CONSUMPTION FUNCTIONS BASICS MACRO ECONOMICS

—  CONSUMPTION FUNCTION

—  MACRO ECONOMICS

—  CONSUMPTION FUNCTION

—  ACCORDING TO KEYNES CONSUMPTION IS A FUNCTION OF INCOME. THE AMOUNT OF MONEY THAT PEOPLE SPEND OUT OF NATIONAL INCOME ON THE PURCHASE OF GOODS AND SERVICES FOR THE DIRECT SATISFACTION OF THEIR WANTS IS CALLED AGGREGATE

CONSUMPTION.

—  PROPENSITY TO CONSUME:-REFERS TO SCHEDULE THAT SHOWS THE RELATIONSHIP BETWEEN DIFFERENT LEVELS OF CONSUMPTION AND DIFFERENT LEVEL OF INCOME.

—  C=f(Y)

—  EXPLANATION

—  FEATURES

1.        PSYCHOLOGICAL CONCEPT

2.       UNEQUAL PROPENSITY TO CONSUME

3.       INCOME AND EMPLOYMENT DEPEND ON PROPENSITY TO CONSUME

4.       CONSUMPTION IN THE SHORT RUN

5.       LONG RUN CONSUMPTION FUNCTION : C=BY

—  SHAPES OF DIFFERENT CONSUMPTION CURVES

—  KINDS OF PROPENSITY TO CONSUME

1.        AVERAGE PROPENSITY TO CONSUME:- RATIO OF CONSUMPTION EXPENDITURE TO ANY PARTICULAR LEVEL OF INCOME.

2.       AVERAGE PROPENSITY TO CONSUME =C/Y

3.       MARGINAL PROPENSITY TO CONSUME: IS THE RATIO OF CHANGE IN CONSUMPTION TO CHANGE IN THE INCOME

4.       MPC = Δ  C/Δ Y  IF INCOME IS 100 CONSUMPTION IS 70 AND THEN INCOME RISES TO 200 AND CONSUMPTION IS 130, MPC =60/100=.6

—  FEATURES OF MPC

1.        ALWAYS POSITIVE

2.       ALWAYS GREATER THAN ZERO AND LESS THAN UNITY

3.       MPC OF THE POOR CLASS IS HIGHER

4.       CONSTANT MPC IN THE LONG RUN

5.       FALLING MPC IN THE SHORT PERIOD

6.       IT CAN BE GREATER THAN IN ABNORMAL CONDITIONS

—  CAUSES OF FALL IN MPC

1.        FULFILLMENT OF BASIC WANTS

2.       CONSTANT HABITS IN THE SHORT PERIOD

3.       CONSUMPTION EXPENDITURE AND THE LEVEL OF INCOME IN THE PAST

4.       UNCERTAINTY OF FUTURE

—  PROPENSITY TO SAVE

—  SCHEDULE SHOWING RELATION BETWEEN INCOME AND SAVING AT DIFFERENT LEVEL OF INCOME. IT IS ALSO FUNCTION OF SAVING. SAVING IS INCOME ELASTIC. S=F(Y)

1.        AVERAGE PROPENSITY TO SAVE:-S/Y

2.       Y=C+S---1

3.       DIVIDED THE WHOLE EQUATION BY Y

4.       1=C/Y +S/Y=APC+APS=Y

5.       MARGINAL PROPENSITY TO SAVE

6.       MPS = ΔS/ ΔY

—  RELATION BETWEEN MPC AND MPS

—  MPC IS LESS THAN UNITY. IT MEANS THAT PART OF THE INCOME WHICH IS NOT SPENT IS SAVED. MPC+MPS =1 OR

1.        S+C=Y

2.       ΔS+ ΔC= ΔY

3.       (ΔS/ ΔY) +(ΔC/ ΔY) =1

4.       MPS+MPC =1

5.       MPS =1-MPC

—  CONSUMPTION FUNCTION

—  MACRO ECONOMICS

—  CONSUMPTION FUNCTION

—  ACCORDING TO KEYNES CONSUMPTION IS A FUNCTION OF INCOME. THE AMOUNT OF MONEY THAT PEOPLE SPEND OUT OF NATIONAL INCOME ON THE PURCHASE OF GOODS AND SERVICES FOR THE DIRECT SATISFACTION OF THEIR WANTS IS CALLED AGGREGATE CONSUMPTION.

—  PROPENSITY TO CONSUME:-REFERS TO SCHEDULE THAT SHOWS THE RELATIONSHIP BETWEEN DIFFERENT LEVELS OF CONSUMPTION AND DIFFERENT LEVEL OF INCOME.

—  C=f(Y)

—  EXPLANATION

—  FEATURES

1.        PSYCHOLOGICAL CONCEPT

2.       UNEQUAL PROPENSITY TO CONSUME

3.       INCOME AND EMPLOYMENT DEPEND ON PROPENSITY TO CONSUME

4.       CONSUMPTION IN THE SHORT RUN

5.       LONG RUN CONSUMPTION FUNCTION : C=BY

—  SHAPES OF DIFFERENT CONSUMPTION CURVES

—  KINDS OF PROPENSITY TO CONSUME

1.        AVERAGE PROPENSITY TO CONSUME:- RATIO OF CONSUMPTION EXPENDITURE TO ANY PARTICULAR LEVEL OF INCOME.

2.       AVERAGE PROPENSITY TO CONSUME =C/Y

3.       MARGINAL PROPENSITY TO CONSUME: IS THE RATIO OF CHANGE IN CONSUMPTION TO CHANGE IN THE INCOME

4.       MPC = Δ  C/Δ Y  IF INCOME IS 100 CONSUMPTION IS 70 AND THEN INCOME RISES TO 200 AND CONSUMPTION IS 130, MPC =60/100=.6

—  FEATURES OF MPC

1.        ALWAYS POSITIVE

2.       ALWAYS GREATER THAN ZERO AND LESS THAN UNITY

3.       MPC OF THE POOR CLASS IS HIGHER

4.       CONSTANT MPC IN THE LONG RUN

5.       FALLING MPC IN THE SHORT PERIOD

6.       IT CAN BE GREATER THAN IN ABNORMAL CONDITIONS

—  CAUSES OF FALL IN MPC

1.        FULFILLMENT OF BASIC WANTS

2.       CONSTANT HABITS IN THE SHORT PERIOD

3.       CO—  CONSUMPTION FUNCTION

—  MACRO ECONOMICS

—  CONSUMPTION FUNCTION

—  ACCORDING TO KEYNES CONSUMPTION IS A FUNCTION OF INCOME. THE AMOUNT OF MONEY THAT PEOPLE SPEND OUT OF NATIONAL INCOME ON THE PURCHASE OF GOODS AND SERVICES FOR THE DIRECT SATISFACTION OF THEIR WANTS IS CALLED AGGREGATE CONSUMPTION.

—  PROPENSITY TO CONSUME:-REFERS TO SCHEDULE THAT SHOWS THE RELATIONSHIP BETWEEN DIFFERENT LEVELS OF CONSUMPTION AND DIFFERENT LEVEL OF INCOME.

—  C=f(Y)

—  EXPLANATION

—  FEATURES

1.        PSYCHOLOGICAL CONCEPT

2.       UNEQUAL PROPENSITY TO CONSUME

3.       INCOME AND EMPLOYMENT DEPEND ON PROPENSITY TO CONSUME

4.       CONSUMPTION IN THE SHORT RUN

5.       LONG RUN CONSUMPTION FUNCTION : C=BY

—  SHAPES OF DIFFERENT CONSUMPTION CURVES

—  KINDS OF PROPENSITY TO CONSUME

1.        AVERAGE PROPENSITY TO CONSUME:- RATIO OF CONSUMPTION EXPENDITURE TO ANY PARTICULAR LEVEL OF INCOME.

2.       AVERAGE PROPENSITY TO CONSUME =C/Y

3.       MARGINAL PROPENSITY TO CONSUME: IS THE RATIO OF CHANGE IN CONSUMPTION TO CHANGE IN THE INCOME

4.       MPC = Δ  C/Δ Y  IF INCOME IS 100 CONSUMPTION IS 70 AND THEN INCOME RISES TO 200 AND CONSUMPTION IS 130, MPC =60/100=.6

—  FEATURES OF MPC

1.        ALWAYS POSITIVE

2.       ALWAYS GREATER THAN ZERO AND LESS THAN UNITY

3.       MPC OF THE POOR CLASS IS HIGHER

4.       CONSTANT MPC IN THE LONG RUN

5.       FALLING MPC IN THE SHORT PERIOD

6.       IT CAN BE GREATER THAN IN ABNORMAL CONDITIONS

—  CAUSES OF FALL IN MPC

1.        FULFILLMENT OF BASIC WANTS

2.       CONSTANT HABITS IN THE SHORT PERIOD

3.       CONSUMPTION EXPENDITURE AND THE LEVEL OF INCOME IN THE PAST

4.       UNCERTAINTY OF FUTURE

—  PROPENSITY TO SAVE

—  SCHEDULE SHOWING RELATION BETWEEN INCOME AND SAVING AT DIFFERENT LEVEL OF INCOME. IT IS ALSO FUNCTION OF SAVING. SAVING IS INCOME ELASTIC. S=F(Y)

1.        AVERAGE PROPENSITY TO SAVE:-S/Y

2.       Y=C+S---1

3.       DIVIDED THE WHOLE EQUATION BY Y

4.       1=C/Y +S/Y=APC+APS=Y

5.       MARGINAL PROPENSITY TO SAVE

6.       MPS = ΔS/ ΔY

—  RELATION BETWEEN MPC AND MPS

—  MPC IS LESS THAN UNITY. IT MEANS THAT PART OF THE INCOME WHICH IS NOT SPENT IS SAVED. MPC+MPS =1 OR

1.        S+C=Y

2.       ΔS+ ΔC= ΔY

3.       (ΔS/ ΔY) +(ΔC/ ΔY) =1

4.       MPS+MPC =1

5.       MPS =1-MPC

 NSUMPTION EXPENDITURE AND THE LEVEL OF INCOME IN THE PAST

4.       UNCERTAINTY OF FUTURE

—  PROPENSITY TO SAVE

—  SCHEDULE SHOWING RELATION BETWEEN INCOME AND SAVING AT DIFFERENT LEVEL OF INCOME. IT IS ALSO FUNCTION OF SAVING. SAVING IS INCOME ELASTIC. S=F(Y)

1.        AVERAGE PROPENSITY TO SAVE:-S/Y

2.       Y=C+S---1

3.       DIVIDED THE WHOLE EQUATION BY Y

4.       1=C/Y +S/Y=APC+APS=Y

5.       MARGINAL PROPENSITY TO SAVE

6.       MPS = ΔS/ ΔY

—  RELATION BETWEEN MPC AND MPS

—  MPC IS LESS THAN UNITY. IT MEANS THAT PART OF THE INCOME WHICH IS NOT SPENT IS SAVED. MPC+MPS =1 OR

1.        S+C=Y

2.       ΔS+ ΔC= ΔY

3.       (ΔS/ ΔY) +(ΔC/ ΔY) =1

4.       MPS+MPC =1

5.       MPS =1-MPC