Consumption function is the functional relation between consumption and income i.e. consumption is the function of income.

So consumption directly varies with level of income. When the income of a community rises, consumption also rises and vice-versa.

 If consumption is denoted by C and income is

denoted by Y then consumption function is simply expressed by C = f( Y ) Where, c= consumption y=income This function is also written in linear form: c = a+bYd Where, autonomous consumption.

 b = marginal propensity to consume,

or slope of consumption curve. Yd = disposable income

a schedule of consumption function is given below Income (Y) consumption C=f(Y) Saving 0 60 -60 100 140 -40 200 220 -20 300 300 0 400 380 20 500 460 40

 Above table clearly shows that consumption

expenditure increases as increase in income. But increasing rate of income is greater than increasing rate of consumption expenditure.
Y

consumption

Y= C+S C

A 0 X Income

Determination of consumption function

the consumption function Keynes mentions two principal factors which influence consumption. They are
1)Subjective factors and 2)Objective factors.

 Subjective factors-The subject factors are (endogenous)

internal to the economic system. They include psychological characteristic of human nature, social practices and institutions and social arrangements. Individual motives Peoples desire to build reserves for unforeseen contingencies The desire to provide for anticipated future needs(old age, sickness)

 The desire to accumulate large wealth to get higher

social status. The desire to enjoy gradually increasing expenditure in order to improve the standard of living. The desire to enjoy a sense of independence and power to do things. The desire to secure a business projects.

 Business motives- the subjective factors are also

influenced by the behavior of business corporation and government. Enterprise, the desire to do big things and to expand. Liquidity, the desire to meet emergencies and difficulties. Income rise the desire to secure large income and to show successful management. The desire to save more against depreciation and to charge dept.

 Objective factors-The objective factors are as fallows: Change in the wage level. Distribution of income. Change in fiscal policy. Change in expectation. If war is expected in near

future people start to hoard goods in anticipation of future security and rising consumption.

 Change in rate of interest.

Social security. Credit facilities. Holding of liquid assets. Attitude toward saving.

Measures to raise the propensity to consume.

The following measures which tend to raise the

propensity to consume:Income redistribution. Increase wages. Social security measures. Credit facilities. Advertisement. Development of means of transport. Urbanisation.

TYPES OF SAVING
Personal saving-saving made by individual for their

own reasons. Corporate saving- saving made by corporation through undistributed profits. Government saving- It is the government receipts minus government expenditure. Forced saving- Forced saving is occurs during a period of inflation which helps to reduce the demand for consumption goods.

DETERMINANTS OF SAVING.
Level of income.
Rate of interest. Holding of liquid assets. Social safety nets. Institutional factors. Change in price level. Habit Size of population.

PARADOX OF THRIFT
Classical economist regarded saving as a great virtue.

They encouraged people to spend less and save more. The aggregate saving should be increased to raise the aggregate investment. The raised investment increase income and employment in the economy. But Keynes has argued that more saving is not good for the. It is a vice for economy. The economy paradox reveals that an attempt on the part of community to save more out of any given level of income will lead to an actual decrease in the amount it will succeed in saving

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PARADOX OF THRIFT
The desire of consumer to save more at each level of

income is equivalent to their desire of spent less at each level of income. The increase in saving leads to decrease in consumption function and ultimately decrease in income and saving. The following fig. shows the paradox of thrift-:

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Saving
S+S S I S F E

S
Z

Income

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PARADOX OF THRIFT
In fig. s and I are saving and investment curve

respectively. Saving and investment are equal at point E. At this point equilibrium saving is os and level of income is oY. Suppose that community saving increases and the saving curve shifts upwards in the form of s+s. F is the new equilibrium point where OZ is the new

equilibrium income and OS

is new saving.
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PARADOX OF THRIFT
The volume of saving has declined from os to OS and

income also has declined from oY to OZ. This explains the paradox that an attempt to increase aggregate saving would actually lead to decrease in saving.

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