Question

Briefly explain the subjective and objective factors of consumption function?

Answer 1

Subjective Factors:

1. The motive of precaution: To build up a reserve against unforeseen contingencies. e.g. Accidents, sickness
2. The motive of foresight: The desire to provide for anticipated future needs, e.g. Old age
3. The motive of calculation: The desire to enjoy interest and appreciation.
4. The motive of improvement: The desire to enjoy improving the standard of living.
5. The motive of financial independence.
6. The motive of the enterprise (desire to do forward trading).
7. The motive of pride. (desire to bequeath a fortune)
8. The motive of avarice. (purely miserly instinct)

Objective Factors:

1. Income Distribution:
If there is a large disparity between rich and poor, the consumption is low because rich people have a low propensity to consume and a high propensity to save.

2. Price level:

1. Price level plays an important role in determining the consumption function.
2. When the price falls, real income goes up; people will consume more, and the propensity to save of the society increases.

3. Wage level:

1. Wage level plays an important role in determining the consumption function and there is a positive relationship between wage and consumption.
2. Consumption expenditure increases with the rise in wages.
3. Similar is the effect with regard to windfall gains.

4. Interest rate:

1. Rate of interest plays an important role in determining the consumption function.
2. Higher rate of interest will encourage people to save more money and reduces consumption.

5. Fiscal Policy:
When the government reduces the tax the disposable income rises and the propensity to consume of community increases.

6. Consumer credit:

1. The availability of consumer credit at easy installments will encourage households to buy consumer durables like automobiles, fridges, computer.
2. This pushes up consumption.

7. Demographic factors:

1. Ceteris paribus, the larger the size of the family, the grater is the consumption.
2. Besides the size of the family, the stage in the family life cycle, place of residence, and occupation affect the consumption function.

8. Duesenberry hypothesis:
Duesenberry has made two observations regarding the factors affecting consumption.

1. The consumption expenditure depends not only on his current income but also past income and standard of living.
2. Consumption is influenced by the demonstration effect. The consumption standards of low-income groups are influenced by the consumption standards of high-income groups.

9. Windfall Gains or losses:
Unexpected changes in the stock market leading to gains or losses tend to shift the consumption function upward or downward.