![]() ![]() Ĭriticism Proportional relationship between consumption and income is not always true. The short run consumption function ratchet upwards when income increases in the long run but it does not shift down to earlier level when income declines. Ratchet effect is a peculiar phenomenon observed in this case. In this equation, the consumption income ratio in the current period is regarded as function of ratio of current income to the previous peak income. Duesenberry combines his two related hypothesis in the following form C t / Y t = a-b Y t /Y o Where C - Consumption Y- Income t -Current time period o - Previous Peak a - positive autonomous consumption b- Consumption Function The outcome of this statement is that as income falls consumption declines but proportionately less than decrease in the income because the consumer dissaves to sustain consumption. According to Duesenberry it is harder for a family to reduce its expenditure from a higher level than for a family to refrain from making high expenditures in the first place. Rich people will have a lower APC and poor people will have higher APC but in long run APC will remain constant. Īccording to Duesenberry human beings not only try to keep up with joneses but try to surpass the joneses which shows that consumers’ preferences are interdependent. B) Consumption Relations are irreversible and not reversible in time. Based on two assumptions: A) Consumption behaviour of an individual is not independent but interdependent on other individual. Theories of consumption Function Relative Income Hypothesis is given by James Duesenberry. Measures to raise the Propensity to Consume Income Redistribution Increased Wages Social Security Measures Credit Facilities Advertisement Development of the Means of Transport Urbanisation Distribution of Income Attitude towards Saving Duesenberry Hypothesis Change in Rate of interest Financial policies of Corporations. On the basis of above characteristics there can be individual as well as Business Motives. ![]() Behaviour Pattern of Business concerns Social arrangements affecting distribution of income. Psychological characteristics of human nature. ĭeterminants of Consumption Function Subjective factors ( endogenous or internal to the economic system). It assumes the existence of lassiez-Fare Capitalist economies and is in operative in case of socialist economies. The law does not operate in abnormal conditions like war, revolution or hyperinflation. It assumes the existence of normal conditions. Table: 2 Income( Y) Consumption( C) Savings (S) 0 20 -20 60 70 -10 120 120 0 180 170 10 240 220 20 300 270 30Īssumptions It assumes a constant Psychological and Institutional complex which means that income distribution, tastes, habits, social customs, price movements, population growth,etc remain constant and consumption depends on income. Increase in income always leads to increase in both consumption and saving. The increased income will be divided in some proportion between consumption expenditure and saving. Thus, it increases less than proportionately. Three related Propositions When Income increases, consumption expenditure also increases but by a smaller amount. Keynes’s Psychological law of Consumption This law says “that men are disposed as a rule and on the average to increase their consumption as their income increases but not by as much as the increase in their income”. Economic significance of the MPC lies in filling the gap between income and consumption through planned investment to maintain the desired level of income. MPC is assumed to be positive and less than unity which means that consumption is an increasing function of income and it increases by less than the increase of income. MPS=1-MPC Significance of MPC Over the long run APC and MPC are equal and approximate 0.9. Marginal Propensity to Consume It is defined as the ratio of change in consumption to the change in income. APC= C/Y APC declines as income increases because the proportion of income spent on consumption decreases. Expressed as percentage or proportion of income consumed. ![]() Properties of the Consumption Function The Average Propensity to Consume: The average propensity to consume may be defined as the ratio of consumption expenditure to any particular level of income. Consumption is an increasing function of income Symbolically C= f (Y) Consumption Schedule It is the tabular representation of various amounts of consumption expenditure corresponding to different levels of income. Consumption Function It is a functional relationship between two aggregates i.e., total consumption and National Income.
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