Consumption Function and Equation

Consumption Function

It is a function which shows

relationship between

Consumption

and

National Income

C = F(Y)

Where

C = Consumption

Y = Income

F = Functional Relationship

Consumption Schedule

It can be seen that

There is minimum consumption which is to be spent even at 0 level of income

This is called Autonomous Consumption

As the income of person increases, consumption also increases

But not in same proportion as income

The rate of change of consumption to change of income is called Marginal Propernsity to Consume

Graph of Consumption Expenditure and Income

On X Axis, We represent Income

On Y Axis, We Represent Expenditure

It can be seen that

Consumption Curve is Positively Sloping

(It increases with increase in income)

Also, Consumption curve Starts from Point S and Not Origin

(This is because there is minimum level of expenditure even at 0 level of income)

OS Represents Autonomous Expenditure

Now Drawing Income Curve

It can be seen that it is a Positively sloping line starting from Origin

It makes an angle of 45 degree with x axis

Note-

Consumption Curve and income Curve intersect at Point E

At this point, Income = Consumption

This is called Break even Point

Before this Point, Consumption is more than Income

After this Point, Income is more than consumption

Equation of Consumption Function

It is represented by

C = Ĉ + b(Y)

where

C = Total Consumption

Ĉ = Autonomous Consumption

Y = Income

b = MPC

Explanation

We know that

Even at 0 Level of income, there is minimum consumption

This is called Autonomous Consumption or Ĉ

On Additional Income, only part of income is consumption

As the income of person increases, consumption also increases

But not in same proportion as income

The rate of change of consumption to change of income is called Marginal Propernsity to Consume

It is represented by B here

Example

In above case

Autonomous Consumption or Ĉ is 4000

Out of Additional 10000 Income, 8000 is spent

Hence ,MPC = 80000/10000 = 0.8

Consumption at any level of income can be calculated using formula

C = Ĉ +b(Y)

At 30000 Income level

Autonomous Consumption or Ĉ = 4000

b = MPC = 0.8

Y = 30000

C = Ĉ +b(Y)

= 4000 + 0.8*30000

= 40000+24000

= 28000

Similarly At 50000 Income level

Autonomous Consumption or Ĉ = 4000

b = MPC = 0.8

Y = 50000

C = Ĉ +b(Y)

= 4000 + 0.8*50000

= 40000+40000

= 44000

Example 14

Using the equation of consumption function: C=c+b(Y), = calculate consumption expenditure at the income level of ₹ 500 crores, if autonomous consumption is ₹ 40 crores and 40% of additional income is saved.

Example 24

Find consumption and savings when autonomous consumption is ₹ 40, MPC is 0.4 and Income is ₹ 1,000. Is there greater increase in income as compared to consumption when income increases to ₹ 1,500?

Autonomous Consumption or Ĉ = 40

MPC = 0.4

Income = 1000

Consumption = ?

Savings = ?

Example 20

The break-even level of income for an economy is given to be ₹ 10,000 crores. If the economy saves 20 per cent of additional income, then calculate the value of autonomous consumption.

What is Slope and Intercept of Consumption Equation?

We have studied in Math's that

Slope of line is

y = mx + c                      [1]

where

m is slope of line

c is y intercept

Now, Consumption equation function is

C = Ĉ +b(Y)

C = b(Y) +Ĉ                   [2]

Comparing [1] and ]2]

Slope of line is b (MPC)

Intercept is Ĉ (Autonomous Consumption)

NCERT Questions

No questions in this part

Other Books

Question 1

"There is minimum consumption, even when the income level is zero."

Defend or refute.

Question 2

The consumption function of an economy is :C = 40 + 0.8Y (amount in Rs crores).

Determine that level of income where average propensity to consume will be one.