Presentation on:-

consumption function
Presented by:- Ashpak khan
B.com(prof.)
Meaning
The functional relationship between
consumption and income is called
consumption function(or propensity
to consume).

Y=C+S,
Where Y= income
C= consumption
S = Savings
Consumption function
C= f (Y,Ys,Ymp,W,i,CA,CE,IWD,u)

 C= Consumption
 Y =Income of consumers
 Ys = Consumers’ expectations about future income
 Ymp = Consumers’ max. past income
 W=wealth
 i=interest rate
 CA=credit aviability
 CE= Consumers’ expectations about future price
 IWD =Distribution of wealth and income
Graph of consumption and Savings
Features of consumption
function
•Amount of consumption expenditure which is
actually incurred.
•Individual or whole society
•Whole schedule.
•Remains constant during short period.
•Poor is more than rich.
•CF curve may be compared to demand curve.
•Directly related to the level of income.
•At zero level, it will be positive.
•Higher propensity to consume is a virtue
Determinants of Consumption
1. Disposable Income
The most important determinant
of consumption
2. Credit Availability
3. Stock of Liquid Assets
 in the hands of consumers
4. Stock of Durable Goods
 in the hands of consumers
5. Consumer Expectations
Keynesian consumption function
According to Keynesian
 According to Keynes, the volume of consumption depends
upon the size of income.
 There is a stable functional relationship between total
income and consumption, this relationship is called
Propensity to Consume or Consumption function, and
Shown as:
C = f(Y)
It shows there is a functional relationship between the total
consumption and total income.
The Keynesian Consumption Function
A consumption function with the
C properties Keynes conjectured:

C  C  cY

c c = MPC
= slope of the
1
consumption
C function

Y
Consumption function or propensity
to consume

Average propensity Marginal

to consume (APC) propensity to
APC = C/Y consume(MPC)
MPC = ΔC/ΔY
Average Propensity to Consume (APC):
 APC is the ratio of total consumption to
the total income, i.e.
 APC = C/Y
 The nature of APC is that it declines as
income increases, because the
proportion of income spent on
consumption decreases.
 That means the gap between Y and C
widens, i.e. the average propensity to
save increases as income increases.
 This can be better understood by the
help of a figure shown below:

10
 Y

Consumption (Rs.)

C
90
B
80
A
C

X
O 100 120

Income (Rs.)
The figure shows the average propensity to consume at any one
point on the consumption curve CC.

The CC curve is made up of a series of such points and all such

points represent the propensity to consume at different levels of
income.

At point A, the APC is 80/100 = 80%, and when income rises
from 100 to 120, the consumption also increases from 80 to 90,
i.e. APC at point B is 90/120 = 75%.

It shows, the total consumption increases when the income

increases, but the proportion of income devoted to consumption
declines with the increase in income.

Thus, the flattering of the CC curve to the right shows declining

APC.
Marginal Propensity to Consume (MPC):
The concept of MPC is considered as an essential part of general theory of
employment.
As we know, consumption expenditure is considered as important
determinants of employment, output and income.
So, the MPC shows that additional employment depends on additional
consumption when income rises.
Hence, the concept of MPC is important to create the employment in the
economy.
MPC: Its is the ratio of the change in consumption to the change in income,
symbolically:
 MPC = C/ Y
Where, C refers to change in consumption and Y
refers to the change in income.
 Value of MPC: it is obvious that neither will all the
incremental income be consumed, not will it be
entirely saved.
 If the entire incremental income is consumed then,
MPC = C/ Y = 1, and
 If, on the other hand, no portion of incremental
income is consumed, then MPC = C/ Y = 0
 However, in reality, some portion of incremental
income will always be consumed. It means that the
value of MPC will be greater than zero but less than
unity, i.e. MPC >0 but < 1.
From the MPC, we can derive the marginal propensity to save
(MPS), i.e.
MPS = 1- MPC or 1 - C/ Y
MPC can be shown diagrammatically as:

Consumption (Rs.)
C
90 B
C A MPC
80

C
Y
X
O 100 120

Income (Rs.)
 The figure shows, when income rises by Rs. 20/-,
consumption increases by Rs. 10/-.
Hence the MPC = C/ Y, i.e. 10/20 = 0.5 or 50%
Which shows, the MPS is also 50%.
 Hence, the marginal propensity to consume is measured by
the slope of the CC curve.
Relationship Between APC and MPC:

 The analysis of APC and MPC shows that –

(a) Both decline with an increase in incomeBut, the
decline in MPC is greater than the decline in APC.

It is the case of rich communities

because most of their basic needs
have already been fulfilled. As a
result additional income is saved
and the MPS rises.

 The whole analysis shows that as

the real income of the community
increases, the consumption also
increases but less than the increase
in income.
Factors Determining the Consumption Function:
(a) Subjective or Internal or Endogenous factors
(b) Objective or External or Exogenous factors
 The subjective factors determine the slope and position of
the consumption function, where as the objective factors
determine the shifts in the consumption function, as
illustrated by:

Fig: a Y Fig: b
Y
C’
C3
C C
C1
C C2

Y Y1 O Y
O X X
18
Figure (a) shows a change in consumption
expenditure because of change in income with no
change in propensity to consume.

Where as figure (b) illustrates the change in

consumption expenditure caused by changes in the
propensity to consume keeping income constant.
Subjective Factors in the
Consumption Function:

•The subjective factors can be grouped

into three classes, such as

•(a) Psychological characteristics of

human nature,

•(b) Institutional patters and

•(c) Social practices.

Objective Factors in the Consumption
Function:
There are some important factors which causes shift
in the consumption function in the community.
These are as follows:
(a) Fiscal policy
(b) Changes in the rate of interest
(c) Changes in expectation
(d) Windfall gains or losses
(e) Changes in price level
(f) Distribution of income
(g) Duesenberry factors
(h) Past standard of living