Consumption Function
Meaning of Consumption Function
The consumption function or inclination to consume refers to incomeconsumption relationship. It is a “functional relationship between two aggregates, i.e. total consumption and gross national income.” Metaphorically, the relationship is represented as C = f (Y),, where C is consumption, Y is income and f is the functional relationship. Thus the consumption function indicates a functional relationship between C and Y, where C is he dependant by Y is the independent variable, i.e. C is determined by Y.
Let us see few illustrations which explain the consumption function.
Illustration 7
Given the tablet below, you have to ascertain the average and marginal propensity to consume.
Income
Y 
Consumption
C 
2000 
1900 
2200 
2080 
2400 
2240 
2600 
2380 
2800 
2500 
3000 
2600 
3200 
2680 
Solution
Income
Y 
Consumption
C 
Average
Propensity to Consume 
Marginal
Propensity to Consume 
C / Y 
Δ C / Δ Y 

2000 
1900 
1900 / 2000 = 0.95 
 
2200 
2080 
2080 / 2200 = 0.94 
180 / 200 = 0.9 
2400 
2240 
2240 / 2400 = 0.93 
160 / 200 = 0.8 
2600 
2380 
2380 / 2600 = 0.91 
140 / 200 = 0.7 
2800 
2500 
2500 / 2800 = 0.89 
120 / 200 = 0.6 
3000 
2600 
2600 / 3000 = 0.86 
100 / 200 = 0.5 
3200 
2680 
2680 / 3200 = 0.83 
80 / 200 = 0.4 
Illustration 8
Given the saving function S =  20 + 0.2Y and autonomous investment, I = $100 million. You are required to ascertain
 The Equilibrium level of income
 The level of consumption
 If investment increases permanently by $10 millions, what will be the new levels of income and consumption
Solution
According to saving investment approach, equilibrium level of national income is ascertained by equalling saving and investment, thus
S = I
Hence,

20 + 0.2Y = 100
0.2Y = 120
Y = 120 / 0.2
(i) Hence equilibrium of Income (Y) = 600
According to consumption function, Consumption equals income over savings, thus
C = Y – S …..Equation
(2)
Hence,
S = 
20 + 0.2Y …..Equation
(1)
Substituting the value of Y in the Equation (1), we get the following
S = 
20 + 0.2 (600)
= 
20 + 120
Hence Saving (S) = 100
Substituting the value of S and I in the Equation (2), we obtain the following
C = 600 – 100
(ii) Hence the level of consumption (C) = 500
With the increase in investment by $10 millions, the new investment will be equal to $110 millions
S = I
Hence,
 20 + 0.2 Y = 110
0.2 Y = 110 +20
Y = 130 / 0.2
(iii) Hence, the new level of income would be (Y) = $650 millions
Now, Saving =  20 + 0.2 Y
=  20 + 0.2 (650)
= 20 + 130
Hence Saving (S) = 110
Substituting the new values of S and Y, the new consumption (C) would be computed as below
C = Y  S
= 650 – 110
(iii) Hence, the new level of consumption would be (C) = $540 millions
Illustration 9
Given in the below tablet, Income and Consumption based on which you are required to ascertain the following
 Average Propensity to Consume
 Average Propensity to Save
 Marginal Propensity to Consume and
 Marginal Propensity to Save
Income
Y 
Consumption
C 
240 
240 
360 
340 
480 
440 
600 
540 
720 
640 
840 
740 
Solution
Income
Y 
Consumption
C 
Average
Propensity to Consume 
Average
Propensity to Save 
Marginal
Propensity to Consume 
Marginal
Propensity to Save 
APC = C / Y 
APS = S / Y 
MPC = Δ C / Δ Y 
MPS = Δ S / Δ Y (1  MPC) 

240 
240 
240 / 240 
0 
 
 
360 
340 
340 / 360 = 0.94 0r 94% 
0.06 
100 / 120 = 0.83 
0.167 
480 
440 
440 / 480 = 0.91 or 91% 
0.09 
100 / 120 = 0.83 
0.167 
600 
540 
540 / 600 = 0.9 or 90% 
0.10 
100 / 120 = 0.83 
0.167 
720 
640 
640 / 720 = 0.88 or 88% 
0.12 
100 / 120 = 0.83 
0.167 
840 
740 
740 / 840 = 0.88 or 88% 
0.12 
100 / 120 = 0.83 
0.167 
Illustration 10
In an economy, the basic equations are as follows:
The consumption function is C = 240 + 0.8Y and
Investment function is Ī = 500
You are required to ascertain the following
 Equilibrium level of income
 Equilibrium level of consumption
 Equilibrium level of saving
 Equilibrium level, aggregate demand equals aggregate supply and saving leakages equals investment injections
Solution
The equilibrium condition is given as Y = C + I
Thus,
Y = 240
+ 0.8Y + 500
Y – 0.8 Y = 740
Y (1 – 0.8) = 740
0.2Y = 740
Y = 740 / 0.2
(a) Hence, the equilibrium level of income (Y) = 3,700
The consumption function is C = 240 + 0.8Y
When Y = 3,700,
C = 240
+ 0.8 (3700)
C = 240 + 2,960
(b) Hence, the equilibrium level of consumption (C) = 3,200
The saving equation is S = Y – C
When Y = 3,700 and C = 3,200, we have
S = 3,700 – 3,200
(c) Hence, the equilibrium level of saving (S) = 500
(d) Now the aggregate demand and aggregate supply has to be equal for equilibrium level which equals saving leakages and investment injections.
Hence,
C
+ I = C
+ S
3,200 + 500 = 3,200 + 500
3,700 = 3,700
(Or) Saving equals investment S = I
500 = 500
Illustration 11
Presume the consumption function is C = Ca + b Y and investment is I = Ī, then
 Determine the equation for the equilibrium level of productivity
 Determine the equilibrium level of productivity when Ca = 300, b = 0.8 and Ī = 500
Solution
The equilibrium condition is given as Y = C + I.
Y = Ca + b Y + Ī
Y – b Y = Ca + Ī
Y
(1 – b) = Ca
+ I
(a) Y = Ca
+ Ī ……..Derivative
(1)
(1 – b)
Substituting the values in the Derivative (1), we obtain the following
Y = 300
+ 500
1  0.8
Y = 800 / 0.2
(b) Hence, the equilibrium productivity level is 4,000
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 Accelerator theory of Investment
 Average Propensities, Marginal Propensity to Save
 Camouflaged Redundancy
 Classical Vs. Keynesian Models of income and Employment
 Concept of multiplier
 Complex Multiplier
 Criticisms of Keynesian Thesis
 Drift Theory of Consumption
 Foreign Trade Multiplier
 Government Expenditure
 Investment Function
 Jorgenson's Neoclassical Notion of Investment
 Keynesian Postulations and Underdeveloped Countries
 Keynesian Theory of Income, Output and Employment
 Model of National Income Determination
 Principle of Acceleration and the Super Multiplier
 Principle of Acceleration and the Super Multiplier  Part I
 Thrift, Marginal Competence of Capital
 Saving Function
 Saving and Investment Equality
 Saving  Investment Parity
 Some New Theories of Investment
 Theory of Consumption Function
 Unemployment and Full Employment