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Hitesh Jhanji, Lovely Professional University Unit-7: Theory of Consumption Function

UNIT-7: Theory of Consumption Function Notes

Contents
Objectives
Introduction
7.1 Keynes Consumption Function Theory
7.2 Absolute Income Hypothesis
7.3 Summary
7.4 Keywords
7.5 Review Questions
7.6 Further Readings

Objectives
After studying this unit, students will be able to :
y Know the consumption function principle of Keynes’s,
y Study of absolute income hypothesis.

Introduction

In the previous chapter we have described the relation among income and consumption render by
Keynes we says it consumption function. After Keynes, Economist is studying some component to
affect the consumption function and creates new principle related with it. It is- (1) Absolute income
principle related Tobin; (2) Relative income principle of Dussenberry ; (3) Certain income principle
of Friedman; (4) life-cycle principle of Modygliani. Before describe these principles we briefly explain
the principle of Keynes on which these all principles are corrective.

7.1 Keynes Consumption Function Theory

Keynes renders the consumption function principle in his book General Theory. According to him, all
consumption is the function of all current disposable income. It is shows as-
C = a + cy d
Where a is a positive autonomous consumption that is effect by non-income component on consumption.
So it is not affected by the increment or decrement in income. It is constant. C is the frontier consumption
nature (MPC) and y is disposable income that have customer for expenses after tax.
d
The relation between consumption and income is dependent on Keynes ‘Psychological rule of
consumption’ it indicates that when income increases then consumption expenses is also increases but
in low quantity. In other words, being increment in income, consumption expenses are not increase as
proportionally. The mean of the perception of that non-proportional consumption function is that short
period average nature (APC) and frontier consumption nature (MPC) are not similar. But APC > MPC
and MPC is positive but less then unit: 0 < MPC < 1. Lastly, in the consumption function of Keynes’s

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