FACTORS WHICH INFLUENCE CONSUMPTION FUNCTION

by • 02/07/2011 • B.COM PART 1 EconomicsComments (0)796

The consumption and saving decision may on the following basis:

  • Effects of Changes In Expected Future Income:

Expected future income is an important factor affecting consumption and saving decision. For example an individual who is currently not employed but who has a contract of high paying job, will consume more today than another unemployed person.

  • Wealth:

At an individual level, an increase in wealth may raise MPC because less saving is needed.

  • Government Policy:

By taxation and public spending, the government can influence the level of consumption. An increase in direct taxation lowers disposable income and thereby reduces the capacity for consumption.

  • The Rate Of Interest:

The cheaper the rate of interest and the greater the availability of credit, the more likely it is that consumption will occur.

  • Price Expectation:

In certain circumstances, when price raises are anticipated, consumption might be brought forward. This temporarily raises MPC.

  • Liquidity Preference:

Is people prefer to keep their income liquid form, consumption is reduced correspondingly.

  • Future Needs:

People reduce their present consumption to save resources for old age, children’s reduction and construction of houses etc. If such needs are more than their present consumption will reduce.

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