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Behavior of Consumption Function

Consumption function which explains the relationship between disposable income consumption may assume two forms, viz., (i) Linear consumption function, and  (ii) Non-linear consumption function.

The Linear Consumption Function

The linear consumption function can be expressed as follows:

               C = a+ By
Where   C = Consumption expenditure,
               a = Consumption at zero level of income and it remains constant,
               b = Marginal propensity to consume, and
               Y = Any given level of income.

Diagrammatic Representation

Linear consumption function can be shown graphically. Consumption curve can be drawn by plotting consumption against varying levels of income.

The consumption function has a slope of ΔC/ΔY (i.e., marginal propensity to consume). positive slope of the consumption curve shows that the MPC is postives increases in income lead to increases in spending.

In consumption spending is shown on the Y-axis and disposable income on the X-axis with a uniform scale.

The following observations can be made from:

1.    450 line has a positive slop of unity. It joins all those points where desired consumption equals disposable income. It helps to locate break-even level of income at which consumption spending equals disposable income.

2.    On 450 line Average propensity to Consume equals unity (i.e., APC = 1). Below this level APC is greater than unity and above it APC is less than unity.

3.    Below break-even level, consumption exceeds income, therefore, consumers run down savings or borrow. Above break-even level income exceeds consumption so there is positive saving.

4.    At all levels of income, Marginal Propensity to Consume (MPC) is greater then zero, but less than unity.

5.    A linear consumption function is represented by a straight line consumption curve. It implies that the MPC is constant at all levels of income.

The Non-linear Consumption Function

The Linear Consumption Function presented above in depicts situation in which a constant proportion of each increment of an economy’s income will be used for consumption purpose. In other words, we assume MPC is constant in such a consumption function. linearity is assumed because a linear consumption function is easy to manipulate.

Modern economists, however, are not very certain about this relationship. This relationship presumably can work both ways.

It is possible, however, that the MPC of an economy may decline as the level of its income increase. In other words, the slope of the consumption function at the higher level of income may be relatively lesser than that at the lower levels of income. In such cases where the consumption function continues to change its slope, it is understood as the non-linear consumption function.

Such a declining MPC consumption function is shown in

At the higher levels of income, consumption expenditure in the economy rises little with each subsequent increases in income; the MPCs at the higher levels of income are relatively low and declining. In ΔY1,ΔY2, ΔY3 etc. represent equal increments of income and ΔC1, ΔC2, ΔC3, etc. corresponding increments in consumption. Sine the increments of consumption expenditure get progressively smaller, the consumption function is represented by a curve which grows progressively flatter.

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