Income Theory of Consumption | Keynesian Consumption Function

Sat, 01/21/2012 - 06:43 -- Umar Farooq

Keynesian Consumption Function

The Keynesian consumption function, as elaborates by the post Keynesian economists likes James Tobin, Arthur Smithies is called the absolute theory of consumption. Consumption spending is the positive function of the absolute level of income that is, higher the level of current income, higher is the consumption demand and vice versa.  

Feature of Income Theory of Consumption

The silent features of absolute income theory of demand consumption are following:

1. Consumption. Consumption depends upon income particularly, the current disposable income (yd).

It is

c = f(yd)

Where

yd = y-T

2. Short Run. The absolute income theory of demand consumption is concerned with short-run period only. Short run means a period which includes a trade cycle only.

3. Two components of consumption. According to Keynes, consumption has two components namely:

Autonomous consumption (ca)

Induced consumption (cy)

c = ca + cy

Whereas

Ca > 0 & 0 < c < 1

4. Consumption Expenditure. Consumption is not stable. It means that there are not much changes in consumption expenditure of the people.

5. Non-Proportionality between Income & Consumption. Non-proportional relationship exists between consumption and income. It means when y increases / decreases, c also increases / decreases but not in the same proportion. The non-proportionality is also confirmed because of (ca) the consumption expenditures which are made even at zero income.

6. Increase in saving. When the consumption does not increases in the same proportion but to increase in income, it means there will be the savings in the economy. In other words, along with increase in the income, saving also increases.

7. APC > MPC. MPC is less than APC at all levels of income while APC = c/y and MPC = delta c / delta y

8. APC and Saving Falls. When income rises, the APC falls and when income falls, savings also fall.

9. Long-Run. In short-run consumption will be less than the consumption in the long-run.

10. MPC<1. According to Keynes, MPC is less than 1. We can say the say’s law is not true in real life because we do not spend all of the increase in income. Hence goods will remain unsold. This may result in unemployment.