The world famous modern economist Lord J. M.

Keynes wrote a well known book General theory of employment, interest and money in 1936. Keynes theory of income and employment states that the volume of employment in the economy depends upon the level of effective demand. The level of effective demand is determined by the aggregate demand function and aggregate supply function. In a two sector mode, Keynes made use of two components of aggregate demand viz. consumption expenditure and investment expenditure. Consumption expenditure is an important constituent of aggregate demand in an economy. Keynes was not interested in the factors determining aggregate supply, since he was concerned with short run and existing productive capacity. THE CONCEPT OF CONSUMPTION FUNCTION As demand of a commodity depends upon its price [DD=f (P)]. Similarly the consumption of a commodity depends upon the level of income. The consumption function or propensity to consume refers to an empirical income consumption relationship. It is a functional relationship indicating how consumption varies as income varies. Consumption function is a simple relation between income (Y) and consumption (C). Symbolically C = f (Y) Where, C: Consumption f: Functional relationship Y: Income In the functional relation, consumption is dependent variable and income is independent variable. Hence consumption is dependent on income

PROPERTIES OR TECHNICAL ATTRIBUTES OF CONSUMPTION FUNCTION

In this analysis Keynes has used two technical attributes or properties of consumption function. (1) Average propensity to consume (APC), and (2) Marginal propensity to consume (MPC)

(1) Average Propensity to Consume (APC): Average propensity to consume refers to the ratio of consumption expenditure to any particular level of income. Symbolically: APC = Where: C : Consumption Y : Income

(2) Marginal Propensity to Consume (MPC): Marginal propensity to consume refers to the rate of change in consumption to the change in income. Symbolically: MPC Where: C = Change in consumption Y = Change in income Features of MPC: (1) The value of MPC is greater that zero but less than one (0 < MPC < 1) (2) MPC cannot be negative (always positive) (3) As income increases MPC may fall. TECHNICAL ATTRIBUTES OF PROPENSITY TO SAVE In simplest words, the propensity to save is nothing but a tendency to save. Every individual who earns income has a common tendency not to spend the entire amount, but to save some part of that income. This human tendency to save part of their income itself is a propensity to save. Technically speaking, the propensity to save is a ratio of total saving to total income. There are technical attributes of propensity to save. They are: A. Average Propensity to Save (APS): It is the ratio of total saving to total income. This ratio is given as S / Y. if the income is say Rs. 100/-, saving is say Rs. 40/- and then the Average Propensity to save will be (S/Y = 40 / 100), i.e. 40% of income is saved and remaining 60% of income is not saved i.e. consumed. Since APS is a counterpart of APC, both together constitute total income. Therefore, it is expressed as: APC + APS = 1, or APS + 1APC The Average Propensity to save can also be represented as: APS= S/Y B. Marginal Propensity to Save (MPS): It is the ratio of incremental (changing) saving to incremental (changing) income. This ratio is given as MPS =S/Y Where, S = change in saving and Y = change in income MPC + MPS = 1 or MPS = 1 MPC