Question

Discuss the factors which govern propensity to consume.

Give factors that stimulate the consumption function.

Answer 1

1. Subjective Factors: These are related to psychological aspects of human nature, social customs, and institutional frameworks. They include:

• Foresightedness
• Economic independence
• Occupational motives
• Habit of thrift or being a miser
• Social status
• Expansion in business activities
• Liquidity preference
• Modernization and effective management

These subjective factors are generally stable over the short run and influence consumption behavior from within the individual or society.

2. Objective Factors: These factors bring about actual changes in consumption. They include:

• Change in money income and real income
• Windfall gains or losses (unexpected changes in income)
• Financial policies of institutions, such as taxation and wage policies
• Changes in expectations about the future, for example, political stability or scarcity of goods
• Distribution of income; a more equitable distribution tends to increase propensity to consume
• Social security provisions, which may reduce the urge to save for old age
• Interest rates affect thrift and consumption habits over the long term
• Discoveries of new products that stimulate consumption
• Ownership of durable goods, which may reduce immediate consumption needs
• Attitudes toward saving and thrift
• Urbanization, advertising, development of transport, and communication.