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Consumption
Function
Introduction,
Consumption function,
graphic representation,
Propensity to Consume

By: Kanika Bajaj

Introduction
The amount of money that people spend out of their disposable income
on the purchase of goods & services (for the direct satisfaction of their
wants) is called consumption expenditure or consumption. Consumption
expenditure depends on several factors like income, price level,
demonstration effect, etc. However, it is disposable income of the
individuals and households that impacts the consumption the most.
Consumption Function
Study of consumption function focuses on the mutual relationship b/w
consumption and disposable income. The functional relationship b/w
consumption and disposable income can be expressed as:
C = f(Yd); C=consumption, Yd=Disposable income, f=functional notation
There are two components of personal disposable income, viz,
(i) household saving (ii) household consumption. What is not
saved is what is consumed.
Here, we are focusing on Keynesian consumption function
which is based on the assumption that consumer is not a
prudent planner. He does not plan his current expenditure on
the basis of permanent income or life-cycle income. Instead he
plans his current expenditure exclusively on the basis of his
current income.
Personal Disposable Desired Private
income Consumption Expenditure
0 50
50 90
200 210
250 250
500 450
750 650
875 750
1000 850
Table offers Observations, in accordance with Keynesian concept
of 'psychological law of consumption ‘
(i) There is always some minimum level of consumption
expenditure, even when income is zero. So, how to people
manage it? Obviously by borrowings, implying negative
saving.
(ii) C increases as Yd increases. So that C is positively related to
Yd. Geometrically, it implies an upward sloping C function.
(iii) Increase in C is not equal to increase in Yd. Because a part of
Yd is saved. Rate at which C increases is less than the rate at
which Yd increases.
Propensity to Consume: The Principal Parameter of Consumption
Function

Keynes, focuses largely on the ratio b/w aggregate consumption and

aggregate income or b/w increased consumption & increased income. This
ratio is called propensity to consume and is generally worked out at
different levels of income. Thus, propensity to consume refers to a schedule
that shows the relationship b/w different levels of income and different
levels of consumption. Consumption function shows different levels of
consumption expenditure by the people at different income levels.
- Acc. To Brooman, “Consumption function shows what expenditure
consumers will wish to make on consumer’s goods and services at each
possible level of income.”
Technical attribute of Propensity to consume
Propensity to consume has two technical attributes such as average
propensity to consume & marginal propensity to consume.
Average propensity to consume
It refers to the ratio b/w desired consumption expenditure (C) and personal disposable
income (Yd) corresponding to a given level of Yd.
c = C / Yd ; c = Average propensity to consume,
C= Desired consumption expenditure of the people,
Yd= Personal disposal income.
Fig shows average propensity to consume= LT/OL,
when the level of personal disposable income = OL.
Because, corresponding to OL level of personal
disposable income, individuals and households
tend to spend LT.
Marginal Propensity to Consume
It refers to a ratio b/w change in desired consumption expenditure (∆C)
corresponding to a change in personal disposable income (Yd)
β = ∆C/∆Yd; β=Marginal propensity to consume,
∆C= Change in desired consumption
expenditure, ∆Yd= Change in personal
disposable income
In fig, Yd changes from OL to OL1,
corresponding to it, desired
consumption expenditure changes
from LT to L1T1, Thus ∆C = T1T2,
When ∆Yd = LL1 = TT2,
MPC = T1T2 / TT2.
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