# Theory Of Consumption Function

__Keynes’ Consumption Function: The Absolute Income Hypothesis__

Keynes in his General Theory postulated that aggregate consumption is a function of aggregate current disposal income. The relation between consumption and income is based on his fundamental psychological law of consumption which states that when income increases consumption expenditure also increases but by a smaller amount.

The Keynesian consumption function is written as

C = a + cY a > 0 0 < c < 1

Where a is the intercept, a constant which measures consumption at a zero level of disposal income, c is the marginal propensity to consume MPC and Y is the disposal income.

The above relation that consumption is a function of current disposable income whether linear or non-linear is called the absolute income hypothesis. This consumption function has the following properties:

- As income increases, average propensity to consume (APC = C / Y) falls.

- The marginal propensity to consume MPC is positive but less than unity (0 < C < 1) so that higher income leads to higher consumption.

- The consumption expenditure increases or decreases with increase or decrease in income but non-proportionally. This non-proportional consumption function implies that in the short run average and marginal propensities do not coincide (APC > MPC).

- This consumption function is stable both in the short run and the long run.

This consumption function is expressed in diagram 1, where C = a + cY is the consumption
function. At point E on the C curve the income level is OY1. At this point, APC > MPC
where APC = OC1 / OY1 and MPC = ΔC / ΔY = ER / RE0. This shows disproportional
consumption function. The intercept ‘a’ shows the level of consumption
corresponding to a zero level of income.

At income level OY0 where the curve C intersects the 45 degree line, point E0 represents APC (=OC0 / OY0). Below the income level OY0, consumption is more than income. In this range, APC is greater than 1. Above the income level OY0 consumption increases less than proportionately with income so that APC declines and it is less than one.

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**Other topics under Consumption, Investment and Saving functions:**

- Accelerator theory of Investment
- Average Propensities, Marginal Propensity to Save
- Camouflaged Redundancy
- Classical Vs. Keynesian Models of income and Employment
- Concept of multiplier
- Consumption Function
- 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
- Unemployment and Full Employment