CONSUMPTION FUNCTION

by • 02/07/2011 • B.COM PART 1 EconomicsComments (0)1095

Consumption Function:

Consumption means the amount spend on consumption at a given level of income, but consumption function or propensity to consume (P.C) means the whole of the schedule showing consumption expenditure at various levels of national income. This shows how consumption varies with the variation in income. It is a functional relationship between total consumption and national income.

AVERAGE PROPENSITY TO CONSUME (A.P.C):

Average propensity to consume means consumption divided by the disposable income. It is a relationship between total consumption and total income. If income is Rs.100 and out of it Rs.80 are consumed then APC will be as under:

A.P.C =      Total Consumption

_______________

Total Income

C                  Rs. 80

=  _____      =   ________    =  0.8   or 80 %

Y                 Rs. 100

MARGINAL PROPENSITY TO CONSUME (M.P.C):

Marginal propensity to consume is the ratio of the change in consumption due to change in income. It measures the incremental change in consumption as a result of a given increment in income. If income increases from Rs.100 to Rs.200 and consumption from Rs.80 to Rs.150 then MPC will be:

MPC =                 ∆C

_____

∆ Y

Rs.150                Rs.80                          70

=     ______     _      _______           =       ____           =  0.7

Rs.200                Rs.100                        100

Income (Y) Consumption                  (C)

APC = C/Y

MPC = ∆C/∆Y
150

170

170/150 = 1.2

—-

200

200

200/200 = 1

20/50 = 0.6

250

225

225/250 = 0.9

25/50 = 0.5

300

245

245/300 = 0.8

20/50 = 0.4

In the above schedule we can observe that as income increases consumption also increases but not as equal to income. So we can say that when APC decreases, MPC also decreases but MPC decreases at a faster rate than APC.

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