Page 92 - DECO201_MACRO_ECONOMICS_ENGLISH

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Unit 5: Consumption Function

Unit 5: Consumption Function Notes

CONTENTS
Objectives
Introduction

5.1 Concept of Consumption Function
5.2 Propensity to Consume
5.2.1 Absolute Income Hypothesis

5.2.2 Relative Income Hypothesis
5.3 Factors Determining Propensity to Consume
5.4 Summary
5.5 Keywords
5.6 Review Questions

5.7 Further Readings

Objectives

After studying this unit, you will be able to:
Realise the concept of consumption function;

State the assumptions of Keynes' Psychological Law;
Explain the concept of Propensity to Consume;
Identify the factors that affect propensity to consume.

Introduction

Consumption function refers to the functional or causal relationships between consumption on
the one hand and the various factors determining it on the other. Your income is considered to
be the chief determinant of your consumption, so the consumption function conventionally
refers to the functional relationship between income and consumption.

Did u know? The relationship between income and consumption has always been a subject
of intense study ever since Ernst Ergel, a German statistician, formulated the "laws of
consumption expenditure in 1857". On the basis of statistical data pertaining to the
consumption expenditures of the sample of German households, Angel formulated a set
of three generalisations which are popularly known as "Engel's laws of consumption".
Engel's laws may be stated as follows: As the level of income increases, households tend to
spend:
a decreasing percentage of income on food,
an increasing proportion of income on things such as education, medical facilities,
recreation, etc.

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