Keynesian Consumption Function Theory

Introduction

Keynesian consumption function is an economic theory proposed by John Maynard Keynes in 1936. It states that theory consumers spend a certain proportion of their income on consumption or buying goods and services. The Keynesian consumption function claims that the amount of consumption expenditure is proportionate to disposable personal income, which is the income an individual has to spend or save. This means that when an individual’s income is increased, he or she will spend a certain, greater proportion of it and the greater proportion is what leads to an increase in aggregate consumption.

Keynesian Consumption Function

The Keynesian consumption function is based on the simple concept that consumption expenditure is dependent on the level of income. According to the consumption function, consumption plays an important role in the economy and it provides Keynesian economists with a tool to analyze the effect of changes in consumption on the level of economic activity. The consumption function is composed of the aggregate consumption curve, which shows the relationship between aggregate consumption and disposable personal income, and the marginal propensity to consume, which details the fraction of each extra dollar that is spent on consumption. Keynesian economists assume that the marginal propensity to consume out of an additional dollar of income is stable and it remains constant throughout the changes in income.

When the marginal propensity to consume out of income is greater than one, the total consumption starts growing in a faster speed than the income. As the disposable personal income increases, the total consumption is expected to increase at a faster pace than income. The increase in consumption will lead to an overall increase in economic activity and aggregate demand. This could mean that the economy could be pulled from a recession or possibly from a depression.

The Keynesian economists assume that the relationship between income and consumption is different for different households. Consumption is determined on the basis of the disposable income and it is assumed to be steady for high-income households as compared to low-income households. They assume that people tend to save a larger proportion of extra income as they move up the income level. This means that high-income households have a lower marginal propensity to consume than low-income households.

The Effect of Poverty on the Consumption Function

The effect of poverty can also be seen in the Keynesian Consumption Function. Since the marginal propensity to consume is lower for high-income households than for low-income households, people who are poverty-stricken would be unable to consume as much as those with higher incomes, therefore, resulting in less aggregate demand. This decrease in aggregate demand would further reduce economic activity and lead to further economic stagnation.

Conclusion

In conclusion, the Keynesian Consumption Function is an important tool used by economic theorists and policymakers to explain the relationship between disposable personal income and levels of consumption in an economy. It is important to note that the marginal propensity to consume is different between high-income households and low-income households, which can affect the overall economic activity in the economy. Finally, it is important to note that the effect of poverty on the consumption function can be seen in the fact that people who are poverty-stricken have a lower marginal propensity to consume than those with higher incomes, leading to a decrease in aggregate demand and overall economic activity.

Milton Friedmans consumption function is the idea that the amount of money that people save and spend is based on their income. This idea is an important part of macroeconomics and has been a subject of debate since Friedman first proposed it in 1957.

According to Friedmans consumption function, people tend to save some of their income and spend the remainder. This means that as a persons income rises, their savings will also increase, but their spending will remain relatively constant. This idea is known as the marginal propensity to save.

Friedman argued that people tend to spend a larger fraction of their income as their income increases. This is known as the induced-consumption effect. According to Friedman, this means that when economic growth increases, people will have more money to spend and this in turn will lead to further economic growth.

Friedmans consumption function has been criticized by some economists. They argue that it does not take into account things like the costs of borrowing or other factors which could affect the amount of money a person spends.

Many economists today accept the basic premise of the consumption function but they argue that other factors need to be taken into consideration in order to accurately predict how people will save and spend their money. For example, some economists believe that people may decide to save more of their money if they are worried about their future financial security or if they are concerned about inflation.

Despite the criticisms, Friedmans consumption function is still an important idea in macroeconomics and it is used to develop economics policies, particularly in the area of taxation. The consumption function provides a framework for understanding how consumers decide how to spend their money and thus helps economists in predicting economic growth.