Cunsumption Function
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Consumption Function
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Effective Demand
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Consumption Function
Keynes µ Psychological law of consumption¶
or µPropensity to consume¶ or simply
µConsumption Function¶ is a statement of very common tendency that when income
increases , consumption also increases
but not to the same extent as the increase
in income.
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In the words of Henson, µ The consumption
function shows what changes can be
expressed in consumption from given
changes in income.¶
It could be expressed as ±
C = f (Y)
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Characteristics of Propensity to
Consume
� Psychological concept
� income and employment depend uponpropensity to consume
� Unequal propensity to consume
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Kinds of consumption function or
propensity to consume
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Marginal propensity to consume
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Propensity to save
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Factors affecting Consumption
Function
1. Instinct of miserliness
2. Change in real income
3. Change in the distribution of Income4. Change in Expectation
5. Wages
6. Rate of Interest
7. Liquidity Preference
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Cont..
8. Social Security and life insurance
9. Credit Facilities
10. Discovery of new product11. Changes in taste and fashion
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Consumption function ± Absolute, relative,
permanent income and life cyclehypothesis.
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� The economists generally agree that the
household consumption is a function of household income.
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1. Absolute Income Hypothesis
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Main properties
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Cont..
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Explanation of the Graph
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The Ratchet effect in Consumption
behavior
The effect arises due to households¶
resistance against the fall in consumption
following a decrease in household income
It is so because household get used to a
certain level of standard in the long run
and hence when the income falls, their
consumption falls less than
proportionately.
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