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Consumption and it's determinants

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n economics consumption means the amount spent by a consumer to consume goods and services at a given level of income. There is positive relationship between income and consumption. The consumption varies with income that means consumption increases with the increase in income and vice versa. That means the propensity to consume shows how the consumption expenditure varies with change in income.
According to Dvdley Dillard – “The schedule of propensity to consume may be called consumption function. Because it shows the functional relationship between two variables income and consumption. The propensity to consume does not mean mere desire to place out   varying amount of income.”
Consumption function can be expressed in terms of functional relationship as follows:
C= f(y)
Where C means consumption and Y means income.
When income increases, consumption also increases but the increase in consumption is less than increase in income. The consumption function has been shown in the table below

Consumption Function
                                                               Amount in million dollars
National income                                                                     Total consumption expenditure
                                                                                                        {C=f(y)}
0                                                                                                         20
50                                                                                                       60
100                                                                                                    100
150                                                                                                    140
200                                                                                                    180

In the above table the first column shows the national income that is increased by $ 50 million compared to previous period. The second column shows various amount of real consumption expenditure out of current real income. Here, even when income is zero the total consumption expenditure is $ 20 million. Because people have to spend even if there is no income. When there is no income people have to make consumption expenditure out of past saving or borrowings. In the table consumption is assumed to change by $ 40 million for $ 50 million change in income.
 That means consumption increase by less than the increase in national income. When income is $ 100 million consumption   is also $ 100 million. The point where income is equal to consumption is called the break even point.

Determinants of consumption: 

 The some factors that determine the consumption function are as follows:

  1. Security motives: In this modern age peoples are greatly concerned with economy insecurity created by old age, sickness and other causes. So they want to save money for their future security. And such saving reduces the consumption function.
  2. Demonstration effect: The poor people imitate4 the life style of rich people. So they consume what rich people consume when they earn. Which ultimately cause increase in consumption function.
  3. Distribution of income: The consumption function depends upon the distribution of income. If there is equal distribution of income in the country, the propensity to consume will high while propensity to saving will low. Similarly if there is unequal distribution of income in the country the propensity to consume will high while propensity to saving will low. It is because when the distribution income is unequal more incomes are concentrated on rich people due to which the rich people spend less on consumption.
  4. Future expectations: The people expectations from future also affect the consumption function. If people expect war or shortage of goods or rise in price in future, they purchase more goods at present. Consequently, the propensity to consume increases. 
  5. Price and wage level: If the price level increases the real income of consumer will decreases, so that the propensity to consume as well decreases. Similarly if wage level raises the propensity to consume as well rise and vise versa.
  6. Corporate financial policies: the corporate financial policies regarding retention, dividend payments, and reinvestment affect the consumption function in a number of ways. If the company retain more than they will pay low dividend, which ultimately reduce the income of shareholders. That result low propensity to consume and vice versa.
  7. Rate of interest: Generally interest rate as well affects the consumption negatively. If market interest rate increases, people start to save money rather than consuming, so that propensity to consume reduces and vice versa.
  8. Windfall gain and losses: The windfall gains or sudden increase in business profit leads to an increase in the propensity to consume. On the other hand the sudden losses in business lead to the fall in propensity to consume.
  9. Fiscal policy:  Fiscal policy as well affects the propensity to consume. The progressive tax and increasing in government spending increase the consumption function. On the other hand, the regressive tax reduces the purchasing power of people and reduces the propensity to consume.
  10. Attitude towards thrift: If people have tendency to save more, the consumption function will be low. On the other hand in case of a tendency to save less, the consumption function will be higher.
  11. Consumer’s liquid assets: if the consumer have more liquid assets like cash balance, bank saving and government bonds they feel secured. This makes consumer spend more on consumption.

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