Meaning: -J.M KEYNES introduced the concept of consumption function is his
book “The GeneralTheory of employment,
interest and money”. Keynes developed the ‘Psychological Law ofConsumption”.
This
law indicates.
·
When the income increases, the
consumption expenditure also increases. But consumption expenditure increase at
a lower rate as compared to increase in income.
·
The increase in income results
in increase in consumption as savings. This is because; the rate of change in
consumption is less than change in income.
The consumption
function indicates the functional relationship between consumption and the
level of disposable income. Keynes states that other things being constant
(ceteris paribus) consumption is a function of income. This can be expressed as
follows:
C = f (Y)
Where, C =
Consumption expenditure
f = functional relationship
Y =
income
The consumption function indicates that a change in consumption possible with a change in income. However, consumption need not always dependent on income. The consumption function, which shows the relationship between consumption and income, is explained in the diagram below.
In the above
diagram, ‘CC’ curve represents consumption
curve of consumption function and ‘OY’
curve represents income, which drawn at 45Oand
it shows that at any point income is equal to consumption. It shows that if
income is zero the consumption is not zero but it’s equal to ‘OC’. This ‘OC’
amount of consumption represents the autonomous part of consumption, which is
independent of income. Even if income is zero, there is still consumption
expenditure and it is done through borrowings. As the income increase and at
‘ON’ level of income, the consumption curve ‘CC’ Intersects the income curve
‘OY’ at point ‘B’ and it is called breakeven point.
At break even point, income = consumption below break even point, there is dis-saving, i.e., the consumption
expenditure is more than income. Above break even point, there is saving, i.e
income is more than consumption.
Consumption Schedule.
The consumption
function is also called as propensity to consume. The propensity to consume is
the natural tendency to consume. Consumption depends on level of income. When income increases, consumption
also increase but at a lower rate.
Consumption
function schedule (Rs. Crore)
|
Income (Y)
|
Consumption (C)
|
|
10000
15000
20000
25000
30000
|
13000
15000
17000
19000
21000
|
From the above schedule, it is clear that as the
income increases, the consumption also increases, but at a lower rate. The
schedule also indicates that there can be autonomous consumption. For instance,
when income was Rs. 10000 crore, the consumption expenditure was Rs. 13000
crore, i.e., Rs. 3000 autonomous consumption, which may be done through
borrowing or past savings.
