CONSUMPTION FUNCTION
?The Consumption Function Or Propensity To Consume Refers To Income Consumption Relationship. ?It is a functional relationship between two: total consumption and gross national income. ?The relationship is represented by c=f
?Where c is consumption , y is income and f is functional relationship.
• Thus the consumption function indicates functional relationship between c and y. Where c is dependent and y is independent variable.
• Consumption is an increasing function of income.
Consumption Schedule
• INCOME • 0 • 60 • 120 • 180 • 240 • 300 • 360 CONSUMPTION 20 70 120 170 220 270 320
• Here it is shown that when income is zero during the depression people spend out of their past savings on consumption bcoz they must eat in order to live.
• When income also generated in the economy as 60,it isn’t sufficient (rs10 is dis-saved). • When both consumption and income expenditure is equal to 120,this is the basic consumption level.
• After this income is shown to increase by 60 and consumption by 50.This implies a stable consumption function during the short run as assumed by Keynes.
C O N S U M C 2 P T C1 I O N
C=Y C S1 S B
Y1
Y2
INCOME
• In this diagram income is measured horizontally & consumption is measured vertically. • 450 is unity line where at all levels of income and consumption are equal. • The c curve is a linear consumption function based on the assumption that consumption change by the same amount.(50) • B Is The Break –Even Point Where c=y or oy1=oc1
• When income rises from oy1 to oy2 consumption also increases to c1 to c2,but the increase in consumption is less than the increase in income c1c2<y1y2 • ss’ is the income which is not consumed but saved. • Thus the consumption function measures not only the amount spent on consumption but also the amount saved. • This Is Because The Propensity To Save Is Merely The Propensity Not To Consume.
PROPERTIES OF CONSUMPTION FUNCTION
• The consumption function has two properties. • • Average propensity to consume Marginal propensity to consume
Average Propensity To Consume
• The average propensity to consume may be defined as the ratio of consumption expenditure to any particular level of income. • It is found by dividing consumption expenditure by income . Or APC = C/Y • The apc declines as income increases bcoz the proportion of income spent on consumption decreases.
• But reverse is the case with APS which increases with increase in income. APS=1APC
• It is expressed as the percentage or proportion of income consumed.
C O N S U M P TI O N
C1 R
CON SUM PTIO N C C’’ R C’ N
C
Y1
Y’
Y’’ INCOME
A
B
• Diagrammatically ,the average propensity to consume is any one point on the c curve. • Point r measures the apc of the c curve which is oc ’/ oy’. • The flattening of the c curve to the right shows Declining apc.
MARGINAL PROPENSITY TO CONSUME
• The MPC may be defined as the ratio of change in consumption to the change in income .So • MPC= ?C/ ?Y • MPS=1-MPC
Table
Y C APC=C/Y APS=S/Y MPC=?C/?Y MPS =?C/?Y
120 120 120/120=1 180 170 170/180=.92
0 .08
50/60=.83
0.17
240 220 220/240=.91
.09
50/60=.83
50/60=.83 50/60=.83
0.17
0.17 0.17
300 270 270/300=0.90 0.10 360 320 320/360=.88 0.12
doc_782602307.ppt
?The Consumption Function Or Propensity To Consume Refers To Income Consumption Relationship. ?It is a functional relationship between two: total consumption and gross national income. ?The relationship is represented by c=f
?Where c is consumption , y is income and f is functional relationship.• Thus the consumption function indicates functional relationship between c and y. Where c is dependent and y is independent variable.
• Consumption is an increasing function of income.
Consumption Schedule
• INCOME • 0 • 60 • 120 • 180 • 240 • 300 • 360 CONSUMPTION 20 70 120 170 220 270 320
• Here it is shown that when income is zero during the depression people spend out of their past savings on consumption bcoz they must eat in order to live.
• When income also generated in the economy as 60,it isn’t sufficient (rs10 is dis-saved). • When both consumption and income expenditure is equal to 120,this is the basic consumption level.
• After this income is shown to increase by 60 and consumption by 50.This implies a stable consumption function during the short run as assumed by Keynes.
C O N S U M C 2 P T C1 I O N
C=Y C S1 S B
Y1
Y2
INCOME
• In this diagram income is measured horizontally & consumption is measured vertically. • 450 is unity line where at all levels of income and consumption are equal. • The c curve is a linear consumption function based on the assumption that consumption change by the same amount.(50) • B Is The Break –Even Point Where c=y or oy1=oc1
• When income rises from oy1 to oy2 consumption also increases to c1 to c2,but the increase in consumption is less than the increase in income c1c2<y1y2 • ss’ is the income which is not consumed but saved. • Thus the consumption function measures not only the amount spent on consumption but also the amount saved. • This Is Because The Propensity To Save Is Merely The Propensity Not To Consume.
PROPERTIES OF CONSUMPTION FUNCTION
• The consumption function has two properties. • • Average propensity to consume Marginal propensity to consume
Average Propensity To Consume
• The average propensity to consume may be defined as the ratio of consumption expenditure to any particular level of income. • It is found by dividing consumption expenditure by income . Or APC = C/Y • The apc declines as income increases bcoz the proportion of income spent on consumption decreases.
• But reverse is the case with APS which increases with increase in income. APS=1APC
• It is expressed as the percentage or proportion of income consumed.
C O N S U M P TI O N
C1 R
CON SUM PTIO N C C’’ R C’ N
C
Y1
Y’
Y’’ INCOME
A
B
• Diagrammatically ,the average propensity to consume is any one point on the c curve. • Point r measures the apc of the c curve which is oc ’/ oy’. • The flattening of the c curve to the right shows Declining apc.
MARGINAL PROPENSITY TO CONSUME
• The MPC may be defined as the ratio of change in consumption to the change in income .So • MPC= ?C/ ?Y • MPS=1-MPC
Table
Y C APC=C/Y APS=S/Y MPC=?C/?Y MPS =?C/?Y
120 120 120/120=1 180 170 170/180=.92
0 .08
50/60=.83
0.17
240 220 220/240=.91
.09
50/60=.83
50/60=.83 50/60=.83
0.17
0.17 0.17
300 270 270/300=0.90 0.10 360 320 320/360=.88 0.12
doc_782602307.ppt