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Table of Contents
What is Consumption Function?
Lord J.M Keynes in his general theory explained the concept and theoretical influences or significance of the concept of consumption function. Consumption function shows the functional relationship between two variables – income and consumption. Where consumption depends upon the level of income. Symbolically,
Consumption Function Formula – C = f(Y)
Where,
C = Aggregate real consumption expenditure and
Y = Real gross level of income.
Why Consumption Function is stable in the short run?
Due to change in other subjective and objective factors on which propensity to consume depends other than income. But Keynes maintained that these factor such as distribution of income and wealth, psychological factor like willingness to save, etc. remain more or less constant.
In the short run and this is why the Keynesian consumption remains stable in the short run period. That is why consumption remain stable in the short run period.
Criticism of Keynes Consumption Function
Limitation or criticism of Keynes Consumption functions are explained on the various grounds that are discussed below –
(i) Keynes consumption function was based on the unrealistic assumptions. According to Hazlit Keynes consumption does not support any statistical evidence. According to him, the concept of consumption function is highly ambiguous and it is an useless concept.
(ii) The Keynesian idea that the consumption spending depends only on the current level of income has been seriously criticized by Duesenberry. According to him, current level of consumption depends not only on current income but also past income of the individuals.
(iii) Keynes theory of consumption maintains that due to a fall in income, people reduces the consumption exactly same way, they increase consumption due to increase in their income.
But people generally know about their previous higher level of consumption and they try to maintain the previous standard of living in income level falls.
This often is known as ratchet effect and due to this effect consumption expenditure does not fall when income of the households falls.
(iv) Another important limitations of Keynesian consumption is that he has to failed to reconcite the short run consumption income relationship with the long run time series data.
(v) Duesenberry points out it is the relative income of a consumer rather than his absolute income which determines the consumption behaviour of individuals.
According to him, consumption of an individual depends upon his income relative to the income levels of other individuals in the society.
Conclusion
So friends, this was the concept of Consumption Function. Hope you get the full details about it and hope you like this article.
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