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Consumption function is the functional relation

between consumption and income i.e.consumption is the function of income. Soconsumption directly varies with level of income.

When the income of a community rises,consumption also rises and vice-versa.

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If consumption is denoted by C and income isdenoted by Y then consumption function issimply expressed by

C = f( Y )

Where, c= consumption

y=income

This function is also written in linear form:c = a+bYdWhere, autonomous consumption.

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b = marginal propensity to consume,or slope of consumption curve.

Yd = disposable income

a schedule of consumption function is given belowIncome (Y) consumption C=f(Y) Saving

0 60 -60

100 140 -40

200 220 -20300 300 0

400 380 20

500 460 40

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Above table clearly shows that consumptionexpenditure increases as increase in income.But increasing rate of income is greater thanincreasing rate of consumption expenditure.

X

Y

0

A

C

Y= C+S

Income

consu

mption

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Determination of consumption

function

the consumption function Keynesmentions two principal factors whichinfluence consumption. They are

1)Subjective factors and 2)Objective factors.

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Subjective factors-The subject factors are (endogenous)internal to the economic system. They includepsychological characteristic of human nature, socialpractices and institutions and social arrangements.

Individual motives- Peoples desire to build reserves for unforeseen

contingencies

The desire to provide for anticipated future needs(old

age, sickness)

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The desire to accumulate large wealth to get higher

social status.

The desire to enjoy gradually increasing expenditure

in order to improve the standard of living. The desire to enjoy a sense of independence and power

to do things.

The desire to secure a business projects.

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Business motives- the subjective factors are alsoinfluenced by the behavior of business corporationand government.

Enterprise, the desire to do big things and to expand.

Liquidity, the desire to meet emergencies anddifficulties.

Income rise the desire to secure large income and to

show successful management. The desire to save more against depreciation and to

charge dept.

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Objective factors-The objective factors are as fallows:- Change in the wage level.

Distribution of income.

Change in fiscal policy. Change in expectation. If war is expected in near

future people start to hoard goods in anticipation offuture security and rising consumption.

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Change in rate of interest.

Social security. Credit facilities.

Holding of liquid assets.Attitude toward saving.

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Measures to raise the propensity to consume. The following measures which tend to raise the

propensity to consume:-

Income redistribution. Increase wages.

Social security measures.

Credit facilities.

Advertisement.

Development of means of transport.

Urbanisation.

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TYPES OF SAVING Personal saving-saving made by individual for their

own reasons.

Corporate saving- saving made by corporation throughundistributed profits.

Government saving- It is the government receiptsminus government expenditure.

Forced saving- Forced saving is occurs during a periodof inflation which helps to reduce the demand forconsumption goods.

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DETERMINANTS OF SAVING. Level of income.

Rate of interest.

Holding of liquid assets. Social safety nets.

Institutional factors.

Change in price level.

Habit

Size of population.

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PARADOX OF THRIFT Classical economist regarded saving as a great virtue.

They encouraged people to spend less and save more.The aggregate saving should be increased to raise theaggregate investment.

The raised investment increase income and employmentin the economy. But Keynes has argued that more saving is not good for

the. It is a vice for economy. The economy paradox reveals that an attempt on the

part of community to save more out of any given level ofincome will lead to an actual decrease in the amount itwill succeed in saving

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PARADOX OF THRIFT The desire of consumer to save more at each level of

income is equivalent to their desire of spent less ateach level of income. The increase in saving leads todecrease in consumption function and ultimatelydecrease in income and saving.

The following fig. shows the paradox of thrift-:

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S

aving

17

I

S+S

S

IncomeYZ

S

S

EF

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PARADOX OF THRIFT

In fig. s and I are saving and investment curverespectively. Saving and investment are equal at pointE. At this point equilibrium saving is os and level ofincome is oY.

Suppose that community saving increases and thesaving curve shifts upwards in the form of s+s. F isthe new equilibrium point where OZ is the new

equilibrium income and OS is new saving.

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PARADOX OF THRIFT The volume of saving has declined from os to OS and

income also has declined from oY to OZ.

This explains the paradox that an attempt to increaseaggregate saving would actually lead to decrease insaving.

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