SIGNIFICANCE OF CONSUMPTION AND SAVING FUNCTION

The consumption function as well as the saving function are important tools of economic analysis, particularly the former one. The relationship between consumption and income(alternatively saving and income) is the foundation stone of the Keynesian Revolution. The consumption and the saving function are the fundamental bases of the Keynesian theory of income determination and multiplier analysis, which are discussed in the subsequent chapters. The consumption function can also be used to explain the ups and downs of a business cycle. Keynes assumes that the consumption function is stable in the short period and increase in effective demand is brought about by an increase in investment. The consumption function along with investment function help us to explain under employment equilibrium and provide challenge to the classical thought broadly incorporated in the Say’s Law. We now turn to explain the investment function in the next chapter.

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