CONCEPT OF
CONSUMPTION FUNCTION
One of the important tools of the
Keynesian Macroeconomics is the consumption function. Consumption function is
simply a name for the general income-consumption relationship embodied in the
Psychological law of Consumption given by Keynes. Keynesian general theory of
employment is based on the consumption function. In economics, consumption
means the amount spent on consumption at a given level of income. There is
direct relationship between income and consumption. If income increases, the
consumption also increases and vice-versa. The consumption function implies the
whole of the schedule showing consumption expenditure at various level of
income of the people. Thus, consumption function is also termed as 'Propensity
to Consume'. In short, the propensity to consume shows how the consumption
expenditure varies with the change in income. According to K.K. Kurihara-
"The propensity to consume is a schedule of expenditure at various income
level".
In the Keynesian theory, we are
concerned not with the consumption of an individual consumer but with the sum
of total consumption spending by all the individuals. The consumption function
or propensity to consume refers to income-consumption relationship. It is a
"functional relationship between two aggregates, i.e., total consumption
and gross national income". So, consumption is function of income. Because,
the consumption changes with the change in income level. Thus, consumption
depends upon the income level of the people. Symbolically, the consumption
function is expressed as, C=f(Y), where, C is the consumption expenditure, Y is
income and f is a function of (functional relationship)
So, the functional relationship
between income and consumption is the consumption function. The consumption
expenditure increases as increase in income. But consumption expenditure does
not increase proportionately to the increase in the income. Consumption
expenditure increases less than the proportionate increases in income. It is
because people want to save part of income. Therefore, propensity to consume
decreases as income increases because consumption will be less in proportion in
relation to income.
The concept of consumption function
can be explained by the help of psychological law of consumption developed by
J.M. Keynor. According to this law people have a tendency to spend more on
consumption when their income increases but not to same extent as income
increase, because a part of income is saved. This can be illustrated as in the
following table.
Schedule of Consumption
Rs. in Crores
Disposable Income (Y)
|
Consumption Expenditure (C)
|
Saving (S)
S = Y–C
|
0
|
20
|
–20
|
60
|
70
|
–10
|
120
|
120
|
0
|
180
|
170
|
10
|
240
|
220
|
20
|
300
|
270
|
30
|
360
|
320
|
40
|
In above consumption schedule,
income increases at the some rate of Rs. 60 crores every time, but the
consumption expenditure increases by only Rs. 50 crores every time. Therefore,
when aggregate income increases, the aggregate consumption expenditure also
increases. But, increase in consumption expenditure is less than
proportionately increase in income, because some part of the increased income
is saved.
Despite, the increase in income by
Rs. 60 Crores every time and consumption expenditure increases by only Rs. 50
crores every time, but saving increases from 0 to Rs. 10, 20, 30 and 40 crores
respectively. So, it can be clearly seen from the consumption schedule that as
income increases, the consumption and saving both increases simultaneously.
The concept of consumption function
can also be illustrated graphically as follows:
In above given figure, consumption
expenditure is presented along on OY–axis and level of income on OX–axis. The
45º line is joint curve showing the relation between income and consumption,
which is started from origin. This 45° line shows the fact that income and
consumption are equal to each other. That is, Y=C shows the fact that all the
income of a consumer is used in consumption expenditure. AEC line represents tzhe
consumption function. This line shows that as income increases the consumption
expenditure also increases. But, this also shows that the consumption
expenditure increases less proportionately as compared to increase in income.
The line showing consumption function originates from the point A on OY–axis.
This is because of consumption won't be zero even if the income decreases to
zero. Although, level of income is zero, the basic necessities must be
fulfilled.
If income is less than the
consumption, then this is fulfilled either by using the past savings or by
taking loan. But, this gap between income and consumption decreases as the
income increases. At OY level of income the consumption and income are equal to
each other. In this situation, there will be neither any saving nor any
defficiency. When income increases beyond this, the consumption will also
increase, but not as fast as income increases because some part of the
increased income will be saved. It can be expressed as:
Y = C+S
Where, Y = Income Level
C = Consumption Expenditure
S = Saving
Hence, consumption function measures
not only the amount of income spent on consumption, but also the amount of
income is saved.
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