Consumption Function

# Consumption Function - consumption expenditure will...

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Consumption Function: After having established that the level of employment is a function of the level of Effective Demand it is necessary to analyze components of effective demand. If the cause of unemployment is deficiency in effective demand, one might wonder at this point, which component is likely to be deficient. This leads us to Keynes’ income equation : ED = Y = C + I In its simplest form total effective demand equivalent to the size of the real national income is composed of two types of expenditure. It is partly made up of C, the consumption expenditure and I the investment expenditure. Let’s begin with the ’C’ component. Keynes at once detects cause of deficiency in the C type of expenditure itself. Consumption is a function of the level of national income Y. This suggests that as income increases

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Unformatted text preview: consumption expenditure will increase in (b) proportion where (a) is the initial amount of consumption even when income is zero. Therefore (b) is the propensity or tendency of consumers to spend a certain proportion of the income. If we assume the value of b as 0.8, it would mean that people spend 80 percent of their income on consumption. If we assume a = 0 then we have : C = by and where b = 0.8 C = 0.8y If Y = 100 then : C = 0.8 (100) = 80 Keynes has further postulated nature of the behavior of the propensity to consume. It is in the form of the law of marginal propensity to consume (MPC). It is known as Keynes hypothesis of MPC. It is as follows : "With every increase in the level of income consumption, expenditure will increase absolutely but will fall relatively."...
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## This note was uploaded on 11/17/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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Consumption Function - consumption expenditure will...

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