This document discusses key concepts related to consumption functions in economics. It defines consumption as aggregate expenditure on goods and services to satisfy wants. Consumption is determined by and a function of income (C=f(Y)). The simple consumption function is expressed as C=C0+C1Y, where C0 is autonomous consumption and C1 is the marginal propensity to consume. Autonomous consumption refers to minimum spending needed even without income. The document also discusses average and marginal propensity to consume, save, and invest, and how these relate to the multiplier concept in economics.

1. Consumption function
• The amount of money people spend out of
national income on the purchase of the goods
and services for the direct satisfaction of their
wants is called aggregate consumption
expenditure or consumption.
1

2. Consumption Function
• The most important function of consumption is
income .
• It means consumption is a function of
(determined by ) income.
Relationship between consumption and income-
C= f (Y)
Where, C= consumption
f= function
Y= income
2

3. • The simple consumption function is shown as :
• C= C0 + C1Y
where
• C = total consumption,
• c0 = autonomous consumption (c0 > 0),
• c1 is the marginal propensity to consume.
• Y = disposable income (income after government
intervention – benefits, taxes and transfer
payments – or Y + (G – T)).
3

4. Definition of 'Autonomous
Consumption
•The minimum level of consumption that would
still exist even if a consumer had absolutely no
income.
Gottheil - Principles of Economics, 4e 4

5. • Certain bills and expenses are deemed to be
autonomous (or independent), such as
electricity, food and rent, because these
expenses cannot ever be entirely eliminated
whether you have money or not. Even in the
worst-case financial scenario, you would still
need to eat and have a place to live. If a
consumer's income were to disappear for a
time, he or she would have to dip into savings
or increase debt in order to pay these
expenses, which is also known as being in a
"dissaving mode
Gottheil - Principles of Economics, 4e 5

6. TABLE OF PROPENSITY TO CONSUME
INCOME CONSUMPTION SAVING (RS CR.)
0 10 -10
100 100 0
200 190 10
300 280 20
400 370 30
500 460 40
Gottheil - Principles of Economics, 4e 6

7. Average Propensity To Consume
• (APC) refers to the percentage of income that is
spent on goods and services rather than on savings.
• The percentage of (what is spent) by the average
household income (what is earned).
• The inverse of the average propensity to consume is
the average propensity to save (APS)
Gottheil - Principles of Economics, 4e 7

8. APC
• The average propensity to consume is the
ratio of consumption to income. It can be
expressed as under.
• For example, if total income is Rs 500 crores
and total consumption is Rs 200 crores,
then:
8
Y
C
APC =
4.0
500
200
orAPC =

9. MARGINAL PROPENSITY TO
CONSUME(MPC)
•A component of Keynesian theory, MPC
represents the proportion of an aggregate raise
in pay that is spent on the consumption of
goods and services, as opposed to being saved.
9

10. MPC
• The ratio of change in consumption to change
in income is known as marginal propensity to
consume.
• Symbolically, change is denoted as ΔY and
change in consumption as Δ C. Hence,
Gottheil - Principles of Economics, 4e 10
Y
C
MPC
∆
∆
=

11. Example
Suppose you receive a bonus with your
paycheck, and it's $500 on top of your
normal annual earnings. You suddenly have
$500 more in income than you did before. If
you decide to spend $400 of this marginal
increase in income on a new business suit,
your marginal propensity to consume will be
0.8 ($400 divided by $500).
Gottheil - Principles of Economics, 4e 11

12. Characteristics of MPC
• It is always positive
• MPC is greater than zero but less than one.
• because the total increase in income is not
consumed a part of it is saved. Thus this
characteristic can be symbolically stated as
0<MPC<I where MPC is always positive but
less than one
• Others
Gottheil - Principles of Economics, 4e 12

14. RELATION BETWEEN MPC AND
MPS
Y =C + S
or
∆Y = ∆C + ∆S
By dividing both sides by ∆Y, we get:
∆Y/∆Y = ∆C/∆Y = ∆S/∆Y
or
I = MPC + MPS

15. Example
Suppose a man’s income increases by Rs 1. If
out of it, he spends 70 paise on consumption
(i.e., MPC = 0.7) and saves 30 paise (i.e., MPS
= 0.3) then MPC + MPS = 0.7 + 0.3 = 1.

16. The Average Propensity to Save (APS)
• The average propensity to save is the ratio of
total savings to total income. Thus,
where, S = saving and Y = income.
The Marginal Propensity to Save (MPS) Marginal
propensity to save is the ratio of change in saving
to change in income.
Gottheil - Principles of Economics, 4e 16
Y
S
APS =

17. Gottheil - Principles of Economics, 4e 17
Y
S
MPS
∆
∆
=
We know that MPC + MPS = 1. Therefore, MPS = 1- MPC or
Y
C
MPS
∆
∆
−=1

18. RELATION BETWEEN SAVING AND
CONSUMPTION
• Y=C+ S
• WHERE Y =DISPOSABLE INCOME
C= CONSUMPTION
S= SAVINGS
AND C= C0+ C1Y
Gottheil - Principles of Economics, 4e 18

19. Investment
• Investment in general sense means using or
spending money on acquiring physical or
financial assets and skills that yield a return
over time.
• Investment conceptually refers to addition
made to the physical stock of capital

20. Propensity to Invest
• An increase in income directly related to an
increase investment. The ratio in which
income changes to change in investment is
called propensity to invest
PI = I / Y
Marginal Propensity to Invest = Change in
Investment/Change in income

21. Autonomous Investment
• Investment which does not change with the
changes in income level and interest rate.
• Even if the income is low, the autonomous,
Investment remains the same.
The Determinants of Autonomous investment
are as:
• Innovation in economy
• Invention of new products
• Growth of population

22. Induced Investment
• Investment which changes with the changes in
the income level and interest rate.
• Induced Investment is positively related to the
income level.
• I =f (Y)

23. Financial Investment
• Investment made in buying financial
instruments such as new shares, bonds,
securities, etc.
• Money invested for buying of new shares and
bonds as well as debentures does not have a
positive impact on employment level,
production and economic growth.

24. Multiplier
According to Keynes,
‘ establishes a precise relationship, given the
propensity to consume, between aggregate
employment and income and the rate of
investment’.

25. It tells that when there is an increment of
investment, income will increase by an
amount which is K times the increment of
investment’’
∆Y= K∆I
K = ∆Y/ ∆I

26. • The important element is the multiplier
coefficient, K which refers to the power by
which any initial investment expenditure is
multiplied to obtain a final increase in income.

27. • The value of the multiplier is determined by
marginal propensity to consume.
K = 1/ MPS
K= 1/1-mpc