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Determinant of the consumption function:

Two principal factors which influence the consumption factor and determine its slope and position.

They are

(A) Subjective factors in the consumption function : These are 8 motive that refrain individuals

from spending out

(1) Individual Motives : of their income

(a) The desire to hold resources for unforeseen contingencies.

(b) The desire to provide for anticipated future needs of old age.

(d) The desire to enjoy a gradually increasing expenditure in order to improve the standard

of living .

(e) The desire to enjoy a sense of independence and power to do things.

(f) The desire to secure a “masse de manoeuvre” to carry out speculative or business

projects.

(g) The desire to bequeath a fortune.

(h) The desire to satisfy a pure miserly instinct.

(2) Business Motives: The subjective factors are also influenced by the behaviour of

business corporations and governments. Keynes lists four motives for accumulation o

their part:

(i)Enterprise: The desire to do big things and to expand.

(ii)Liquidity: The desire to meet emergencies and difficulties successfully.

(iii) income raise : The desire to secure large income and to show successful

management.

(iv) Financial prudence: The desire to provide adequate financial resources against

depreciation and obsolescence and to discharge debt.

(B)Objective Factors: are exogenous or external to the economic system. They may therefore,

undergo rapid changes and may cause marked shifts in the consumption function they are:

(1) Change in the wage level: If the wage rate rises the consumption function shift upward. The

workers having a high propensity to consume spend more out of their increased income and tends

to shift C curve upward. If, however, the rise in the wage rate is accompanied by a more than

proportionate rise in the price level, the wage rate will fall and it will tend to shift the C curve

downward. A cut to the wage rate will also reduce the consumption function of the commodity due

to a fall in income, employment and output. This will shift the curve downward.

(2) Windfall Gains or Losses : unexpected changes in the stock market leading to gains or losses tend

to shift the consumption function upward or downward.

(3) Changes in the Fiscal Policy : Change in fiscal policy in form of taxation and public expenditure

affect the consumption function. Heavy commodity taxation adversely affect the consumption

function by reducing the disposable income of the people.

(4) Change in Expectations : Change in future expectations also affect propensity to consume. If a

war is expected in the near future, people start hoarding durable and semi- durable commodities in

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anticipation of future scarcity and rising prices. When people envisaged scarcity of fuel in future

people’s consumption of fuel increases. On the contrary, if it is expected that prices are likely to fall

in the future, people would buy only those things which are very essential. It will lead to a fall in

consumption demand and a downward shift of the consumption function.

(5) Change in the Rate of Interest A rise in rate of interest will lead to a fall in the price of bonds,

thereby tending to discourage the propensity to consume of the bond- holders. People may be

encouraged to save rather than invest in bonds.

(6) Financial Policies of Corporations : With regard to income retention, dividend payments and re-

investment tend to affect the consumption function in several ways. If corporations keep more

money in the form of reserves, dividend payments to shareholders will be less, this will have the

effect of reducing the income of the shareholders and the consumption function will shift

downward. Others

(7) Holding of liquid Assets.

(8) The Distribution of income

(9) Attitude towards saving.

Measures to Raise the Propensity to Consume

The following are the measures to increase the propensity to consume:

(1) Income Redistribution in favour of the poor tends to raise the propensity to consume

because the marginal propensity to consume of the low income groups is high in comparison

to the rich. Therefore, the propensity to consume can be raised by transferring income and

wealth from the rich to the poor. Through imposition of prospective take income,

expenditure estate, capital gains etc.

(2) Increased wages: If wages are raised they will have a direct effect in shifting the

consumption function upward. But a policy of high wages adversely affects the level of

employment in the economy for it is not possible to raise the marginal revenue productivity

of labour in the short run.

(3) Social security Measures

(4) Credit facilities

(5) Advertisement

(6) Development of the means of Transport.

(7) Urbanisation

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17 Determinant of the consumption function: Two principal factors which influence the consumption factor and determine its slope and position. They are (A) Subjective factors in the consumption function : These are 8 motive that refrain individuals from spending out (1) Individual Motives : of their income (a) The desire to hold resources for unforeseen contingencies. (b) The desire to provide for anticipated future needs of old age. (c) The desire to enjoy a enlarged future income by way of interest and appreciation. (d) The desire to enjoy a gradually increasing expenditure in order to improve the standard of living . (e) The desire to enjoy a sense of independence and power to do things. (f) The desire to secure a “masse de manoeuvre” to carry out speculative or business projects. (g) The desire to bequeath a fortune. (h) The desire to satisfy a pure miserly instinct. (2) Business Motives: The subjective factors are also influenced by the behaviour of business corporations and governments. Keynes lists four motives for accumulation o their part: (i)Enterprise: The desire to do big things and to expand. (ii)Liquidity: The desire to meet emergencies and difficulties successfully. (iii) income raise : The desire to secure large income and to show successful management. (iv) Financial prudence: The desire to provide adequate financial resources against depreciation and obsolescence and to discharge debt. (B)Objective Factors: are exogenous or external to the economic syste ...
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