Economics » National Income » The Concepts of Consumption, Investment, and Savings



i. Planned Consumption Expenditure (C)

This is made up of planned expenditure by households on durable and non-durable goods and services such as household expenditure on plantain, cars, shoes, and so on.

ii. Consumption Function:

A consumption function, in its simplest form, expresses the relation of consumption to disposable income (defined as gross income minus tax), holding non-income determinants of consumption constant. This function is represented as follows:

C = a + bYd        a > 0; 0 < b < 1

Where C = consumption expenditure; and

Yd = disposable income

The consumption function in this form is a linear function (a straight line) where:

“a” measures consumption expenditure when income is zero (Yd = 0). This is called autonomous consumption. It is independent of the level of disposable income.

“bYd” is income induced consumption expenditure. This is the proportion of consumption expenditure that is dependent on the level of disposable income.

“b” measures the extent of a change in consumption expenditure with respect to a change in disposable income. It is the slope of the consumption function. It is called the Marginal Propensity to Consume (MPC).

Figure 11.2 depicts the consumption function. “a” is non- income induced consumption expenditure or the autonomous consumption expenditure and the line marked C= a + bYd is the consumption function. The slope of the consumption function is ∆C/∆Yd and is equal to “b”.

Fig. 11.2:  Consumption Function

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