Question

Illustrate and explain the Keynesian propensity to consume diagrammatically.

Answer 1

Keynesian consumption function, where consumption is on the vertical axis and income on the horizontal. The C line represents how consumption changes with income. A 45° line from the origin serves as a reference, where any point on it means consumption equals income. For instance, at point A, the horizontal distance (OB) is equal to the vertical distance (AB), so income can be measured along either axis.

The properties of consumption functions can be explained as follows:

1. The consumption curve (C) slopes upward, meaning that as income rises, so does consumption. Even with zero income, individuals or households still consume a minimum amount, known as autonomous consumption, which is supported through borrowing or using past savings. This is shown as the intercept ‘a’ on the Y-axis in the diagram. At low income levels, the consumption line lies above the income line, indicating dissaving – spending more than the income. As income grows, consumption increases, and at a certain point (G), known as the break-even point, income equals consumption. Beyond this point, the curve lies below the income line, suggesting positive savings – where income exceeds consumption.
2. The Marginal Propensity to Consume (MPC) is the slope of the consumption curve (C), which is upward sloping but less steep than the 45° line. This shows that MPC is positive but less than 1, meaning people consume only a part of any increase in income. The Average Propensity to Consume (APC) at any income level is found by dividing consumption (C) by income (Y). In a linear consumption function, MPC remains constant, but in a non-linear case, MPC can decrease with higher income, reflecting a smaller share of additional income being spent. The Keynesian consumption function applies to both linear and non-linear forms.