CONCEPT OF CONSUMPTION FUNCTION

One of the important tools of the Keynesian Macroeconomics is the consumption function. Consumption function is simply a name for the general income-consumption relationship embodied in the Psychological law of Consumption given by Keynes. Keynesian general theory of employment is based on the consumption function. In economics, consumption means the amount spent on consumption at a given level of income. There is direct relationship between income and consumption. If income increases, the consumption also increases and vice-versa. The consumption function implies the whole of the schedule showing consumption expenditure at various level of income of the people. Thus, consumption function is also termed as ‘Propensity to Consume’. In short, the propensity to consume shows how the consumption expenditure varies with the change in income. According to K.K. Kurihara- “The propensity to consume is a schedule of expenditure at various income level”.

In the Keynesian theory, we are concerned not with the consumption of an individual consumer but with the sum of total consumption spending by all the individuals. The consumption function or propensity to consume refers to income-consumption relationship. It is a “functional relationship between two aggregates, i.e., total consumption and gross national income”. So, consumption is function of income. Because, the consumption changes with the change in income level. Thus, consumption depends upon the income level of the people. Symbolically, the consumption function is expressed as, C=f(Y), where, C is the consumption expenditure, Y is income and f is a function of (functional relationship)

So, the functional relationship between income and consumption is the consumption function. The consumption expenditure increases as increase in income. But consumption expenditure does not increase proportionately to the increase in the income. Consumption expenditure increases less than the proportionate increases in income. It is because people want to save part of income. Therefore, propensity to consume decreases as income increases because consumption will be less in proportion in relation to income.

The concept of consumption function can be explained by the help of psychological law of consumption developed by J.M. Keynor. According to this law people have a tendency to spend more on consumption when their income increases but not to same extent as income increase, because a part of income is saved. This can be illustrated as in the following table.

Schedule of Consumption

Rs. in Crores

Disposable Income (Y) Consumption Expenditure (C) Saving (S)

S = Y–C

0 20 –20
60 70 –10
120 120 0
180 170 10
240 220 20
300 270 30
360 320 40

In above consumption schedule, income increases at the some rate of Rs. 60 crores every time, but the consumption expenditure increases by only Rs. 50 crores every time. Therefore, when aggregate income increases, the aggregate consumption expenditure also increases. But, increase in consumption expenditure is less than proportionately increase in income, because some part of the increased income is saved.

Despite, the increase in income by Rs. 60 Crores every time and consumption expenditure increases by only Rs. 50 crores every time, but saving increases from 0 to Rs. 10, 20, 30 and 40 crores respectively. So, it can be clearly seen from the consumption schedule that as income increases, the consumption and saving both increases simultaneously.

The concept of consumption function can also be illustrated graphically as follows:

 

In above given figure, consumption expenditure is presented along on OY–axis and level of income on OX–axis. The 45º line is joint curve showing the relation between income and consumption, which is started from origin. This 45° line shows the fact that income and consumption are equal to each other. That is, Y=C shows the fact that all the income of a consumer is used in consumption expenditure. AEC line represents tzhe consumption function. This line shows that as income increases the consumption expenditure also increases. But, this also shows that the consumption expenditure increases less proportionately as compared to increase in income. The line showing consumption function originates from the point A on OY–axis. This is because of consumption won’t be zero even if the income decreases to zero. Although, level of income is zero, the basic necessities must be fulfilled.

If income is less than the consumption, then this is fulfilled either by using the past savings or by taking loan. But, this gap between income and consumption decreases as the income increases. At OY level of income the consumption and income are equal to each other. In this situation, there will be neither any saving nor any defficiency. When income increases beyond this, the consumption will also increase, but not as fast as income increases because some part of the increased income will be saved. It can be expressed as:

Y = C+S

Where, Y = Income Level

C = Consumption Expenditure

S = Saving

Hence, consumption function measures not only the amount of income spent on consumption, but also the amount of income is saved.

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