Explain consumption function with the help of diagram and schedule ?plz note that it is 6 marks q.
Dear student,
The functional relationship between consumption expenditure and level of disposable income is called Consumption Function.
C = f (Yd)
Where, C is Consumption expenditure
Yd is disposable income
and f is functional relationship between consumption expenditure and disposable income.
The Law of Consumption states that there is a tendency among people not to spend whole of their additional income on consumption, they save a potion of income.
To explain consumption function, economists use two concepts: Average Propensity to Consume and Marginal Propensity to Consume.
APC is the ratio of total consumption to total income.
MPC is the ratio of change in total consumption to change in total income.
Consumption expenditure is further divided into two components:
1) Autonomous Consumption Expenditure : It refers to that portion of expenditure that is independent of disposable income.
2) Induced Consumption Expenditure : It refers to that portion of expenditure that is dependent on level of disposable income.
Consumption expenditure is sum of autonomous and induced consumption expenditure.
C = + cYd
In given fig, AB is consumption curve, it is a upward sloping curve showing positive relation between consumption and disposable income. It does not start from origin. OA is autonomous consumption. C is break even point, at C Consumption = Income. Beyond C, with increase in income, the level of consumption becomes less and before C the level of consumption is more than income.
Regards
The functional relationship between consumption expenditure and level of disposable income is called Consumption Function.
C = f (Yd)
Where, C is Consumption expenditure
Yd is disposable income
and f is functional relationship between consumption expenditure and disposable income.
The Law of Consumption states that there is a tendency among people not to spend whole of their additional income on consumption, they save a potion of income.
To explain consumption function, economists use two concepts: Average Propensity to Consume and Marginal Propensity to Consume.
APC is the ratio of total consumption to total income.
MPC is the ratio of change in total consumption to change in total income.
Consumption expenditure is further divided into two components:
1) Autonomous Consumption Expenditure : It refers to that portion of expenditure that is independent of disposable income.
2) Induced Consumption Expenditure : It refers to that portion of expenditure that is dependent on level of disposable income.
Consumption expenditure is sum of autonomous and induced consumption expenditure.
C = + cYd
| Y | 0 | 20 | 40 | 60 | 80 |
| C = + cYd | 20 | 30 | 40 | 50 | 60 |
| MPC | - | 0.5 | 0.5 | 0.5 |
0.5 |
In given fig, AB is consumption curve, it is a upward sloping curve showing positive relation between consumption and disposable income. It does not start from origin. OA is autonomous consumption. C is break even point, at C Consumption = Income. Beyond C, with increase in income, the level of consumption becomes less and before C the level of consumption is more than income.
Regards