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.
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.