This document outlines the Absolute Income Hypothesis theory presented by Keynes in 1936. The theory states that as absolute income increases, the proportion of that income spent on consumption decreases. So while consumption increases with more income, the rate of increase declines. Key points include consumption (C) increasing at a decreasing rate as income (Y) rises, the average propensity to consume (APC) decreasing as income rises, and the theory showing consumption-income relationships in both the short run and long run.

1. ABSOLUTE INCOME
HYPOTHESIS
BY: AMRINA ABID

2. INTRODUCTION
• THIS THEORY WAS PRESENTED BY KEYNESIAN IN 1936.
• ACCORDING TO THIS THEORY
“ AN INCREASE IN THE ABSOLUTE INCOME, THE FRACTION PROPORTION OF
THAT INCOME DECREASES WHICH IS DENOTED TO CONSUMPTION”
IN SIMPLE WORDS:
“ AN INCREASE IN INCOME CONSUMPTION ALSO INCREASE BUT AT DECREASING
RATE”
IMPORTANT FEATURE ABOUT THIS THEORY IS THAT AN INCOME INCREASES THE
APC DECREASES THROUGHOUT.

3. IMPORTANT ABBREVIATIONS
• Y=INCOME
• S=SAVINGS , S=Y-C
• C=CONSUMPTION
• APC= AVERAGE PROPENSITY TO CONSUME APC= C/Y
• MPC=MARGINAL PROPENSITY TO CONSUME MPC=∆C/∆Y

4. TABLE OF THE THEORY
Y C APC
2000 2400 1.2
4000 4000 1.0
6000 5400 0.9

5. GRAPHICAL PRESENTATION
0
2000
4000
6000
8000
Category 1 Category 2 Category 3
consumption
income
Chart Title
Series 1 Series 2 Series 3

6. SHORT RUN
• SHORT RUN CONSUMPTION FUNCTION SOWS NON PROPORTIONAL
RELATIONSHIP BETWEEN INCOME AND CONSUMPTION.
• IT MEANS THAT INCOME INCREASES CONSUMPTION ALSO INCREASES AT
DECREASING RATE.
0
5000
10000
15000
20000
Category 1 Category 2 Category 3
consumption
income
Chart Title
Series 1 Series 2

7. LONG RUN
• IN THE LONG RUN, IT IS THE INDUCED CONSUMPTION WHICH TELLS US THE
BEHAVIOR OF THE CONSUMPTION OF THE PEOPLE.
0
2000
4000
6000
8000
Category 1 Category 2 Category 3
consumption
income
Chart Title
Series 1 Series 2 Column1