Question

Give three main characteristics of consumption function.

Answer 1

The three main characteristics of the consumption function are:

1. Psychological Concept: The consumption function is primarily a psychological concept, influenced by subjective factors like tastes and habits of individuals. These factors tend to remain constant in the short period, so the propensity to consume remains the same in the short run.
2. Income and Employment Depend on Propensity to Consume: Income and employment levels are directly related to the propensity to consume. An increase in the propensity to consume leads to an increase in total consumption, which in turn increases income and employment. Conversely, a decrease in propensity to consume causes a decline in consumption, income, and employment.
3. Unequal Propensity to Consume: The propensity to consume is different among income groups; poorer people typically have a higher propensity to consume compared to richer people. This is because low-income individuals tend to spend almost all their income on consumption, while wealthier individuals can satisfy their consumption needs with only a part of their income.