Keynesian Consumption Function

Keynesian Consumption Function

• Keynes' consumption function emphasizes that consumption is based on current income.
• This function shows a positive correlation between personal disposable income and private consumption expenditure.
• The graph illustrates this relationship with a line sloping upwards.

Consumption, Saving, and the 45-degree Line

• The consumption function is represented by an upward-sloping curve ('C').
• The 45-degree line (SS') represents income = expenditure.
• This line helps visually determine the relationship between saving and consumption.
• The vertical distance between 'C' and 'SS' represents savings.
• When income and consumption intersect, savings are zero, demonstrating the direct link between income and consumption.

Consumption Function Theory: Definitions

• The consumption function establishes a relationship between consumption (C) and income (Y), represented as C = f(Y).
• It suggests that consumption depends on income, while other factors are held constant.

Consumption Expenditure: Hypothesis and Explanation

• Consumption expenditure is equal to basic income.
• Increased income leads to increased consumption, though not necessarily by the same amount.
• The 45-degree line indicates the point where disposable income and consumption expenditure are equal.
• The graph shows a stable consumption function during the short run.

Consumption Table: Hypothetical Example

• This table shows a positive correlation between income and consumption, where consumption increases with income.
• Even with zero income, there is a base level of consumption.

Properties of Consumption Function: APC and MPC

• The average propensity to consume (APC) is the ratio of consumption expenditure to income. It decreases with rising income.
• The marginal propensity to consume (MPC) is the change in consumption for a one-unit increase in income. It's constant at different income levels.
• The sum of MPC and MPS (marginal propensity to save) is always equal to 1.

Consumption and Saving: Key Points

• An increased income doesn't always lead to a proportional increase in consumption; a portion is typically saved.
• The proportion of income saved may increase with higher income.
• Savings and consumption are interdependent, often increasing together.

Consumption Function: Slope and Data Table

• The slope of the consumption curve ('C') calculates the relationship between income changes and consumption changes.
• The table displays the relationship between income, consumption, and the APC, APS, MPC, and MPS for varying income levels.

Consumption and Marginal Propensity to Consume: Calculation and Relationship

• APC is measured by the ratio of consumption to income and is depicted graphically.
• MPC is the change in consumption divided by change in income.
• The MPC can be determined graphically.
• MPC and MPS are complementary, with their sum always equaling 1.

Keynesian Psychological Law of Consumption: Key Points

• Consumption is largely influenced by psychology and wealth.
• An increase in income leads to an increase in consumption, but not by the same amount.
• As wants become satisfied, consumption increases less relative to income.

Explore the principles of Keynes' consumption function, which highlights the correlation between disposable income and private consumption. This quiz delves into the graphical representation of consumption, saving, and how they relate to the income-expenditure equilibrium, illustrated by the 45-degree line.