Question

Explain the features of consumption.

Answer 1

The features of Consumption (or propensity to consume) are as follows:

1. Psychological Nature: Consumption behavior depends largely on human psychology; it is not merely a function of income but also relates to attitudes, habits, and social practices.
2. Dependence on Income and Employment: The level of consumption in an economy is influenced by the overall income and employment levels. As income increases, consumption also increases but not proportionately.
3. Unequal Propensity to Consume: Different individuals or groups have different propensities to consume. The poor generally have a higher marginal propensity to consume compared to the rich.
4. Short-run vs Long-run Consumption: In the short run, consumption patterns may remain relatively stable, but in the long run, consumption functions can change due to changes in economic conditions and preferences.
5. Average Propensity to Consume (APC): This is the ratio of total consumption to total income, showing how much of total income is spent on consumption.
6. Marginal Propensity to Consume (MPC): This is the ratio of change in consumption to change in income and is always positive but less than one. It tends to fall as income increases.
7. Stability: MPC is generally stable in the short term but can vary due to various factors such as changes in income distribution, social security, wage policies, and credit availability.