Consumption function

 The law states that “men are disposed, as a rule, and on the
average, to increase their consumption as their income
increases but not by as much as the increase in their income”
 It is also known as “Propensity to Consume”
 It is called as Consumption Function
M
A
N
A
G
E
R
I
A
L
E
C
O
N
O
M
I
C
S

Three related Propositions
1. When Income increases, consumption expenditure also increases but by
a smaller amount
2. The increased income will be divided in some proportion between
consumption expenditure and saving
3. An increase in income is unlikely to lead to less spending or less saving
than before
M
A
N
A
G
E
R
I
A
L
E
C
O
N
O
M
I
C
S

¶ When INCOME increases, CONSUMPTION also increases, but not to
the same extent as the increase in INCOME
¶ Consumer spending differs from investment spending is in such a way that
the consumer makes his purchases to satisfy his or that his family’s needs
directly
M
A
N
A
G
E
R
I
A
L
E
C
O
N
O
M
I
C
S

Expresses the relationship between INCOME (Y) &
CONSUMPTION(C)
Y=C+I
amount of consumer expenditure made at a given
level of income(Y)
Symbolically, C=f(Y)
Consumption Schedule: Tabular representation of
various amounts of consumption expenditure
corresponding to different levels of income
M
A
N
A
G
E
R
I
A
L
E
C
O
N
O
M
I
C
S

M
A
N
A
G
E
R
I
A
L
E
C
O
N
O
M
I
C
S
Disposable
Income
Consumption(C) Saving (S)
100 80 20
120 95 25
140 110 30
160 125 35
180 140 40
200 155 45
220 170 50
240 185 55

Y=C+S
Y , INCOME
C,S
C
SC
S
C1
C3
C2
C4
C5
Y1 Y2 Y3 Y4
Y5
K1 K2
K4
K5
45˚
M
A
N
A
G
E
R
I
A
L
E
C
O
N
O
M
I
C
S

Marginal Propensity to
consume
 Ratio of a small change
in the consumption as a
result of a small change
in income
 MPC=
∆𝐶
∆𝑌
 MPS=1-MPC
 Ratio of absolute
consumption to
absolute income at a
particular time
 APC=
𝐶
𝑌
 APS= 1-APC
M
A
N
A
G
E
R
I
A
L
E
C
O
N
O
M
I
C
S
Average Propensity to
Consume

It assumes a constant Psychological and Institutional
complex which means that income distribution, tastes,
habits, social customs, price movements, population
growth, etc remain constant and consumption depends
on income
It assumes the existence of normal conditions. The law
does not operate in abnormal conditions like war,
revolution or hyperinflation.
It assumes the existence of lassiez-Fare Capitalist
economies and is in operative in case of socialist
economies.
M
A
N
A
G
E
R
I
A
L
E
C
O
N
O
M
I
C
S

 Vital importance of Investment
 Oversaving gap
 Underemployment Equilibrium
M
A
N
A
G
E
R
I
A
L
E
C
O
N
O
M
I
C
S

 Proportional relationship between
consumption and income is not always true
 It neglects other factors that influence ,
consumer spending such as asset holdings,
urbanisation, appearance of new products,
etc.
 Expectations and level of aspirations also
play an important role in consumer spending
M
A
N
A
G
E
R
I
A
L
E
C
O
N
O
M
I
C
S

Consumption function

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (15)

Similar to Consumption function

Similar to Consumption function (20)

More from Jerrin Mary John

More from Jerrin Mary John (6)

Recently uploaded

Recently uploaded (20)

Consumption function