Page 97 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Where 'a' is autonomous consumption and 'b.Y' is induced consumption. So, the equation says
that the consumption of a household comprises autonomous consumption and induced
consumption. Autonomous consumption is constant and is determined independently of income.
This may be considered as the "critical maximum consumption" or the "basic minimum need" of
a household that should be met by it irrespective of the household income.
Induced consumption is the consumption induced or generated by income and hence it is a
positive function of income. The parameter 'b' in the term 'b.Y' is the rate at which induced
consumption changes when there is a change in income. It is otherwise called the "marginal
propensity to consume" or MPC and it is the slope of the consumption function. If Y denotes a
change in income and C denotes the change in consumption associated with the change in
income, b, the MPC equals C/ Y [ MPC/ (b) = C/ Y ] and the value of b MPC changes
between 0 and 1 (0<b <1).

Example: If b = 0.8, it means that a 100 rise in disposable income leads to 80 rise in
consumption.
The parameter "a" is the portion of consumption which does not vary with income or to put it
differently 'a' represents the consumption which would occur if income were zero.
The consumption function may be depicted graphically by specifying various levels of income,
determining the corresponding levels of consumption and then plotting the combinations of
income and consumption. Once the intercept and slope are specified, a straight line is completely
determined.

Example: If a equals 100 and b equals 0.75, then, consumption function is C = 100+0.75Y.
The function will start at a = 100 and have a slope 'b' equal to 0.75. Should 'a' change, the
consumption function will shift so that the new function is parallel to the old. Should 'b' change,
the function will rotate about the intercept, a.

Caselet Indians Consuming More Coffee and Tea Now

espite the fast growth of bottled juices and aerated drinks, consumption of tea
and coffee is going up in India. Coffee consumption is up by 6% in the last few
Dyears while tea consumption has been showing a 3% annual growth.
Product innovation and better marketing strategy have helped coffee demand to spread to
north India. Tea continues to be the common man's drink throughout the country.
Widespread popularity of carbonated beverages supported by intense promotional
campaigns has not made a dent in the consumption of tea and coffee. Mushrooming coffee
bars and cafes have made coffee drinking fashionable in cities. With the rising disposable
incomes, these cafes are big hits in metros. Coffee consumption has been aided by increasing
urbanization and greater disposable income. Admittedly, south India as a region has the
largest number of coffee drinkers.
But a recent survey by Coffee Board shows that of late more than 50% growth has come
from non-south regions. Coffee Board Chairman Jawaid Akthar said the coffee consumption
has shown an annual average growth of 6% since 2000. In the previous decades, the growth
was just 2%. "Apart from the high-end outlets, the consumption of instant coffee is increasing
in north India. Our attempt is to popularise filter coffee in the region by removing the
notion that it is difficult to make," he said.
Contd...

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