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
Income | Consumption Expenditure |
0 | 4000 |
10000 | 12000 |
20000 | 20000 |
30000 | 28000 |
40000 | 36000 |
50000 | 44000 |
60000 | 52000 |
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
Income | Consumption Expenditure |
0 | 4000 |
10000 | 12000 |
20000 | 20000 |
30000 | 28000 |
40000 | 36000 |
50000 | 44000 |
60000 | 52000 |
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.
View AnswerC = Ĉ +b(Y)
Income = 500
Autonomous Consumption or Ĉ = 40
Savings = 40%
Find Consumption Expenditure?
Savings = 40%
it means
APS = 40% = 0.4
APS + APC = 1
0.4 + APC = 1
APC = 0.6
C = Ĉ +b(Y)
C = 40 + 0.6(500)
C = 40 + 300
C = 340
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 = ?
View AnswerIs there greater increase in income as compared to consumption when income increases to Rs1500?
When Y = 1000
C = Ĉ +b(Y)
C = 40 + 0.4(1000)
C = 40 + 400
C = 440
Income = C + S
1000 = 440 + S
S = 560
When Y = 1500
C = Ĉ +b(Y)
C = 40 + 0.4(1500)
C = 40 + 600
C = 640
Income = C + S
1000 = 640 + S
S = 360
Yes, there is an increase in consumption by 200 when income increases from 1000 to 1500
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.
View AnswerAt Breakeven level of Income, There is no Savings
It means
Income - Consumption =0
Income = Consumption
10000 = Consumption
Consumption = 10000
C = 10000
Now, person saves 20% of Additional Income
It means MPS = 20% = 0.2
Now, MPC + MPS = 1
0.2 + MPC = 1
MPC = 1 - 0.2 = 0.8
Now Our Consumption Function is
C = Ĉ +b(Y)
Here C = 10000,b = MPC = 0.8, Y = 10000
We have to calculate Ĉ
10000 = Ĉ + 0.8(10000)
10000 = Ĉ + 8000
Ĉ = 10000 - 8000
Ĉ = 2000
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.
View AnswerConsumption Function is represented by:
C = Ĉ + b(Y)
where
C = Total Consumption
Ĉ = Autonomous Consumption
Y = Income
b = MPC
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
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.
View AnswerC = 40 + 0.8Y Eq 1
APC = C/ Y
IF APC = 1
1 = C/ Y
Y = C
So, Eq1 becomes
Y = 40 + 0.8Y
0.2Y = 40
2Y = 400
Y = 200
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