KEYNES'S CONSUMPTION FUNCTION

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MACROECONOMICS

KEYNES'S CONSUMPTION FUNCTION



Introduction

Consumption function has a pivotal role in Keynes's General Theory. Keynes consumption function (Savings function) is a macro concept and shows relation between aggregate consumption (or aggregate savings) and aggregate income also known as the Absolute Income Hypothesis,




Learning Objectives
After reading this chapter, you are expected to learn about:


1. Understand Keynes's theoretical .


2. Comprehend Keynes's view .


3. Get familiar with Keynes's concepts of .


4. Realize the role of .





Keynes Consumption Function


The , THE relation between aggregate consumption or aggregate savings and aggregate income, generally termed the consumption function, has occupied a major role in economic thinking ever since Keynes made it a keystone of his theoretical structure in The General Theory. Keynes took it for granted that current consumption expenditure is a highly dependable and stable function of current income—.that "the amount of aggregate consumption mainly depends on the amount of aggregate income (both measured in terms of wage units)." He termed it a "fundamental psychological rule of any modern community that, when its real income is increased, it will not increase its consumption by an equal absolute amount," and stated somewhat less definitely that "as a rule, . . . a greater proportion of income. . . (is) saved as real income increases." DETERMINANTS OF CONSUMPTION EXPENDITURE According to Keynes, the amount of consumption expenditure depends on the size of national income. This functional relationship is called the propensity to consume or consumption function. Symbolically it is expressed as

C = f (Y)

Where C is consumption expenditure and Y is level of income. Algebraically Keynes consumption function is given as C = a + b Y Where, a is the Minimum Subsistence Consumption Demand b is Marginal Propensity to Consume Y is Level of Income Keynes consumption curve is shown in the following diagram.


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