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Unit 5: Consumption Function
Self Assessment Notes
State whether the following statements are true or false:
15. The amount of consumption depends entirely on the disposable income.
16. A rise in direct rate of taxation would lead to more consumption.
17. A shift in age composition could shift consumption and saving functions.
5.4 Summary
The consumption function – the relationship between consumption and income – is largely
a Keynesian contribution. Keynes postulated that consumption depends mainly on income.
In regard to the relationship, he argued that consumption increases as income increases
but by an amount less than the increase in income.
Marginal Propensity to Consume is a component of Keynesian theory that represents the
proportion of an aggregate raise in pay that is spent on the consumption of goods and
services, as opposed to being saved.
On the other hand, Marginal Propensity to Save is the proportion of a small change in
disposable income that would be saved, instead of being spent on consumption.
It is computed by dividing the change in savings by the change in disposable income that
caused the change.
5.5 Keywords
Autonomous Consumption: The minimum level of consumption that would still exist even if a
consumer had absolutely no income.
Average Propensity to Consume: Fraction or percentage of disposable (after tax) personal income
spent for consumer goods.
Average Propensity to Save: The proportion of total disposable income (individual, household
or national) which represents income used for savings as opposed to expenditure.
Consumption Function: A mathematical function that emphasizes the relationship between
consumption and income (factors determining consumption).
Disposable Income: The amount of money that households have available for spending and
saving after income taxes have been accounted for.
Induced Consumption: Consumption expenditure by households on goods and services which
varies with income.
Marginal Propensity to Consume: Proportion of a small change in the disposable income that
would be spent on consumption instead of being saved.
Marginal Propensity to Save: Proportion of a small change in disposable income that would be
saved, instead of being spent on consumption.
Propensity to Consume: The proportion of total income or of an increase in income that consumers
tend to spend on goods and services rather than to save.
Savings Function: The relationship between an individual's total savings and his or her income.
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