There are two group of factor that affect consumption function:
1. Subjective of internal factor:
These are related to psychological characteristics of human wants. These factors change more in long run rather than short run. These factors are:
a. Precaution motive:
every individual has a strong feeling to prepare for unseen emergencies like sickness, accident, unemployment etc. so they build up reserves for such emergencies
b. Foresight motive:
Every man has future needs. They need to save for old age, educational needs of children, marriage of daughters etc.
c. Motive for independence:
Most of us have a strong desire to be independent financially. So we tend to save by sacrificing present consumption.
2. Objective or External factors:
a. Distribution of income:
This is an important factor of propensity to consume. The more inequality in income distribution, the lower will be the propensity to consume. Equal distribution of income increases the propensity to consume. Poor people have higher MPC, as their basic or primary needs are not satisfied. So, increase in income tends to increase MPC, whereas rich people have lower MPC.
b. Fiscal Policies:
Fiscal policy is related to tax structure and government expenditure. When the taxes are decreased the disposable income with people will increase and so will the consumption and vice versa.
Consumption means: Consumption means using goods for services for satisfying current wants. We spend major portion of our income on consumption. Consumption expenditure means house hold spending. Which satisfies our immediate wants. Under this section, we will study the relationship between consumption and income. The pattern of consumption expenditure for all families is more or less the same. We can see that families have tendencies to increase consumption with increase in income. This relationship between consumption and income is called consumption function. Consumption is a function of income.
C = f(Y)
C – consumption
F – function
Y - income
No comments:
Post a Comment