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. APC = CY
MPC is the ratio of change in total consumption to change in total income. MPC = CY
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 = C¯ + cYd
 
Y 0 20 40 60 80
C = 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

 

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