CONSUMPTION FUNCTION

INTRODUCTION

 AS THE DEMAND FOR A GOOD DEPENDS UPON IT’S PRICE, SIMILARLY

CONSUMPTION OF A COMMODITY UPON THE INCOM ELEVEL.

 CONSUMPTION = f(Y)

 WHEN AN INCOME OF THE COMMUNITY RISES CONSUMPTION ALS O RISES.

 MEANING OF CONSUMPTION
FUNCTION
 IT IS THE FUNCTIONAL RELATIONSHIP BETWEEN TWO AGGREGATES I.E. TOTAL
CONSUMPTION AND GROSS NATIONAL INCOME.
 PROPERTIES OF THE CONSUMPTION
FUNCTION
 THE AVERAGE PROPENSITY TO CONSUME

 THE MARGINAL PROPENSITY TO CONSUME

 AVERAGE PROPENSITY TO CONSUME -

 IT IS THE RATIO OF CONSUMPTION EXPENDITURE TO ANY PARTICULAR LEVEL OF INCOME.

 APC = C/Y

 THE APC DECLINES AS INCOME INCREASES BECAUSE THE PROPORTION OF INCOME

SPENT ON CONSUMPTION DECREASES.

 BUT REVERSE IS THE CASE OF APS(AVERAGE PROPENSITY TO SAVE) INCREASES WITH

INCREASE IN INCOME.

 THUS APS= 1- APC

 DIGRAMATICALLY, THE AVERAGE PROPENSITY TO CONSUME IS ANY ONE
POINT ON THE c CURVE.

 IN PANEL (A), POINT R MEASURES THE APC OF THE C CURVE WHICH IS OC’/
OY’.

 THE FLATTENING OF THE CURVE TO THE RIGHT SHOWS DECLINE IN APC.

MARGINAL PROPENSITY TO CONSUME-

 IT MAYBE DEFINED AS THE RATIO OF THE CHANGE IN CONSUMPTION TO THE

CHANGE IN THE AVERAGE PROPENSITY TO CONSUME AS INCOME
CHNAGES.

 DIVIDNG CHANGE IN CONSUMPTION BY A CHANGE IN INCOME, OR

 MPC= CHANGE IN CONSUMPTION/ CHANGE IN INCOME

 MPC IS CONSTANT AT ALL LEVELS OF INCOME.

 MPS= 1-MPC
INCOME CONSUMP APC=C/Y APS= 1- MPC= MPS = 1-
(Y) TION (C) APC CHANGE MPC
IN C/
CHANGE
IN Y
120 120 100% - -
180 170 92% 0.08 50/60= 0.17
0.83
240 220 0.17
300 270 90% 1-O.90 =
0.10
360 320 0.17
INCOME CONSUMP APC=C/Y APS= 1- MPC= MPS = 1-
(Y) TION (C) APC CHANGE MPC
IN C/
CHANGE
IN Y
250 170 0.68 0.32
300 220 0.73 0.27 1 -
350 270 1 -
400 320 1 -
 KEYNES PSYCHOLOGICAL LAW OF
CONSUMPTION
 WHEN THE TOTAL INCOME OF COMMUNITY INCREASES, THE CONSUMPTION
EXPENDITURE OF THE COMMUNITY WILL ALSO INCREASE, BUT LESS
PROPTIONATELY.
SPENDING
 AN INCREASE IN INCOME -

SAVING
 AN INCREASE IN INCOME WILL LEAD TO AN INCREASE IN BOTH
CONSUMPTION AND SAVINGS. A RISING INCOME WILLL OFTEN BE
ACCOMPANIED BY INCREASED SAVINGS AND FALLING INCOME BY
DECREASED SAVINGS.
 ASSUMPTIONS -

 CONSTANCY OF PSYCHOLOGICAL AND INSTITUTIONAL FACTORS

 NORMAL ECONOMIC CONDITION
 LAISSEZ FAIRE POLICY
 IMPLICATION

 HIGHLIGHTING THE CRUCIAL IMPORTANCE OF INVESTMENT IN AN ECONOMY

 REFUTING SAY’S LAW

 EXPLANATION TO BUSINESS CYCLE

THREE IMPORTANT METHODS OF
NATIONAL INCOME INCLUDED -
 PRODUCT METHOD
 EXPENDITURE METHOD
 NATIONAL METHOD
 ALL OF THE ABOVE
THE AVERAGE PROPENSITY TO
CONSUME IS MEASURED BY -
 C/Y
 C*Y
 Y/C
 C+ Y
AN INCREASE IN CONSUMPTION AT ANY
GIVEN LEVEL OF INCOME IS LIKELY TO LEAD
TO -
 HIGHER AGGREGATE DEMAND
 AN INCREASE IN EXPORTS
 A FALL IN TAXATION REVENUE
 A DECREASE IN IMPORT SPENDING
LOWER INTEREST RATES ARE LIKELY TO -

 DECREASE CONSUMPTION
 INCREASE COST OF BORROWING
 ENCOURAGING SAVING
 INCREASE BORROWING AND SPENDING
IF THE MPC= 0.5, MPS IS WHAT

 0.2
 50
 0.5
 0.9
INVESTMENT FUNCTION
 MEANING

 THE TERM INVESTMENT REFERS TO THE CURRENT COMMITMENT OF FUNDS FOR

A PERIOD OF TIME TO DERIVE THE FUTURE FLOW OF FUNDS THAT WILL
COMPENSATE THE INVESTOR FOR SACRIFICED CONSUMPTION, LOSS OF
PURCHASE POWER AND THE UNCERTAINTY INVOLVED IN THE FUTURE FLOW
OF FUNDS.

 IT SIGNIFIES NEW EXPENDITURE ON ADDITION OF CAPITAL GOODS AND

INVENTORIES.
TELL THE CORRECT ODER-

 1. INVESTMENT IS DEFINED AS BUYING OF SECURITIES, SUCH AS SHARES ETC

OR ALSO AS THE TOTAL PHYSICAL STOCK OF CAPITAL

 2. LEADS TO INCREAES IN EMPLOYMENT

 3. LEADS TO INCREASE IN INCOME

 4. RAISES THE AGGREGATE DEMAND

 THE PRIVATE ENTREPRENEURS IN AN ECONOMY DEPENDS UPON THE
MARGINAL EFFECIENCY OF CAPITAL (MEC) AND THE AVAILABLE RATE OF
INTREST(ARI)

 INVESTMENT WILLHAPPEN WHEN = MEC> ARI

TYPES OF INVESTMENT
 REAL AND GROSS AND
FINANCIAL NET
INVESTMENT INVESTMENT

PRIVATE AND EX-ANTE AND

PUBLIC EX- POST
INVESTMENT INVESTMENT

INDUCED AND
AUTONOMOUS
INVESTMENT
 REAL INVESTMENT- IT MEANS THE INVESTMENT THAT LEADS TO THE CREATION
OF ADDITIONAL PRODUCTIVE CAPACITY.
EXAMPLE- INVESTMENT IN NEW FACTORY BUILDINGS NEW PLANTS AND
MACHINES .

 FINANCIAL INVESTMENT – TRANSFER OF RIGHTS FROM ONE PERSON TO

ANOTHER.IT DOESNOT ADD UP TO THE STOCK OF CAPITAL.
EXAMPLE- PURCHASE OF STOCK AND SHARES, GOVERNMENT BONDS ETC
 GROSS INVESTMENT – TOTAL AMOUNT OF EXPENDITURE MADE ON NEW
FIXED CAPITAL ASSETS
EXAMPLE- HOUSE , FACTORIES

NET INVESTMENT - THE AMOUNT OF EXPENDITURE MADE ON CAPITAL ASSET

AFTER DEDUCTING REPLACEMENT INVESTMENT.
 PRIVATE INVESTMENT – MADE BY PRIVATE INDIVIDUALS ON PROJECTS IN
PUBLIC SECTOR
PROFIT MOTIVATED

 PUBLIC INVESTMENT – MADE BY THE GOVERNMENT OR LOCAL BODIES

 EX-ANTE INVESTMENT- PLANNED INVESTMENT / INTENDED INVESTMENT

 EX POST INVESTMENT – UNPLANNED/ UNINTENDED INVESTMENT

 INDUCED INVESTMENT – INVESTMENT DUE TO CHANGE IN INCOME.
 IT IS INCOME ELASTIC

 FOUND IN PRIVATE SECTOR

 AUTONOMOUS INVESTMENT - NOT AFFECTED BY CHANGES IN LEVEL OF

INCOME. INSENSITIVE OF INCOME CHANGE.
DETERMINANTS OF
INVESTMENT
 RATE OF INTREST
 URGENCY
 DEGREE OF CERTAINITY
 MARGINAL EFFECIENCY OF CAPITAL
 INATNGIBLE FACTORS
 LEGAL FACTORS
 AVAILABILITY OF FUNDS
 FUTURE EARNINGS
 RESEARCH AND DEVELOPMENT PROJECTS
 COST CONSIDERATIONS