2. Determinants of Consumption Function
Keynes mentioned two principles like Subjective
factors ( endogenous or internal to the economic
system) and Objective factors.
Subjective factors
Psychological characteristics of human nature.
Social practices.
Behaviour Pattern of Business concerns
Social arrangements affecting distribution of
income.
Material change in the short-run periods except in
abnormal or revolutionary conditions.
It determine the slope of C curve stable in the short
period.
3. Objective Factors ( external factors)
Changes in wage level: If rise in wage CF shift
upward. The workers higher spending. A cut in
WR will reduce CF due to fall in income.
Windfall Gains or losses: Unexpected change in
stock market leading to gain or loss tend to shift
CF upward or downward. In 1925 there was boom
in America led to rise consumption spending.
Changes in the Fiscal Policy: In the form of
taxation and expenditure affect the CF. Heavy
taxation affect CF by reducing disposable income.
Tt was happen in Second world war due heavy
taxation.
4. Change in Expectations: Change in future
expectations affect to consume. If a war is expected
in future scarcity and rising prices durable
commodities. As a result people buy excess of current
needs and CF upward.
Change in Rate of interest: Changes in market RI
influence CF. A rise in RI will lead to fall in the price
of bonds, shares leads to discourage consumption.
Financial policies of Corporations: Dividend
payments tends to CF.
Distribution of Income: Large disparities between
rich and poor leads to consumption is low.
Attitude towards Saving
Duesenberry Hypothesis
5. Measures to Raise the Propensity to
Consume
Income Redistribution
Increased Wages
Social Security Measures
Credit Facilities
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Development of the Means of Transport
Urbanisation
6. Theories of Consumption Function
Types
1. Absolute Hypotheses
2. Relative Hypothesis
3. Permanent Incomes Hypothesis
4. Life Cycle Hypothesis
7. 1. Relative Income Hypothesis
It is developed by James Duesenberry.
It affected the consumption function
The hypothesis relate to demonstration effect.
The tendency of human beings higher
consumption level emulate the consumption
patterns of one’s rich neighbors.
The consumption preference are interdependent.
Past Peak income hypothesis- explains the short-
run fluctuations in consumption. Community
reaches particular level lead to come down lower
consumption during recession. It reduce in saving
and vice versa.
8. There is no change in CF in short run.
Upward or downward movement in CF when
income rise or falls during short-run.
Exception during abnormal or revolutionary
change unusual events like wars, earthquakes,
strikes, revolutions, major change in tax structure,
Based on two assumptions:
A) Consumption behaviour of an individual is
not independent but interdependent on other
individual.
B) Consumption Relations are irreversible and
not reversible in time.
9. According to Duesenberry human beings not
only try to keep up with joneses but try to
surpass the joneses which shows that
consumers’ preferences are interdependent.
Rich people will have a lower APC and poor
people will have higher APC but in long run
APC will remain constant.
According to Duesenberry it is harder for a
family to reduce its expenditure from a higher
level than for a family to refrain from making
high expenditures in the first place.
10. The outcome of this statement is that as income
falls consumption declines but proportionately
less than decrease in the income because the
consumer dissaves to sustain consumption.
Duesenberry combines his two related hypothesis
in the following form
Ct/ Y t = a-b Yt /Yo
Where C - Consumption
Y- Income
t -Current time period
o- Previous Peak
a- positive autonomous consumption
b- Consumption Function
11. In this equation, the consumption income ratio
in the current period is regarded as function of
ratio of current income to the previous peak
income.
Ratchet effect is a peculiar phenomenon
observed in this case. The short run
consumption function ratchet upwards when
income increases in the long run but it does not
shift down to earlier level when income
declines.
12. Critics
Proportional relationship between
consumption and income is not always true.
It neglects other factors that influence,
consumer spending such as asset holdings,
urbanisation, appearance of new products, etc.
Expectations and level of aspirations also play
an important role in consumer spending.
