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प्रश्न
Explain consumption function with the help of a hypothetical consumption schedule.
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उत्तर
Household consumption expenditure is the largest part of aggregate demand, as most income is spent on consumption. The consumption function shows how total desired spending depends on various factors – like income, interest rates, wealth, and expectations. Among these, income is the key factor. The Keynesian consumption function specifically highlights the relationship between income and desired consumption.
The link between income and consumption is known as the consumption function. The propensity to consume describes how consumption changes with income levels. Economists explain this using two key terms: average propensity to consume (APC) and marginal propensity to consume (MPC).
| Income (Y) (₹) | Consumption (C) (₹) | Savings (S) (₹) | APC | MPC | APS | MPS |
| 1,000 | 900 | 100 | 0.9 | - | 0.1 | - |
| 1,000 | 980 | 120 | 0.89 | 0.8 | 0.11 | 0.2 |
Average Propensity to Consume (APC): The average propensity to consume refers to the proportion of income devoted to consumption.
It is the ratio of total consumption to total income. Thus, average propensity to consume defines the relationship between total consumption and total income.
Symbolically,
APC = `C/Y`
Where C stands for total consumption expenditure and Y is total income.
In Table, When the level of income is ₹ 1000 crore and ₹ 900 crore is devoted to consumption, the average propensity to consume will be 0.9.
APC = `C/Y`
= `(₹900 "crore") /(₹ 1000 "crore")`
= 0.9
The value of APC at any given level of income is measured by the ratio of vertical distance (C) and horizontal distance (Y) at any point in the C curve.
Marginal Propensity to Consume (MPC): Marginal propensity to consume refers to the ratio of change in consumption to change in income.
Symbolically,
MPC(c) = `(DeltaC)/(DeltaY)`
Where ΔC refers to change in total consumption and ΔY refers to change in income.
It is seen from Table that when total income increases from ₹ 1,000 crore to ₹ 1,100 crore, and as a consequence, consumption expenditure increases from ₹ 900 crore to ₹ 980 crore, the MPC will be 0.8.
MPC = `(DeltaC)/(DeltaY)`
= `(980-900)/(1100-1000)`
= `80/100`
= 0.8
The slope of the C curve indicates marginal propensity to consume.
