DETERMINANTS OF PROPENSITY TO CONSUME MACRO ECONOMICS

 DETERMINANTS OF PROPENSITY TO CONSUME

UPDATED
REVISION SERIES

  MACRO ECONOMICS/PRINCIPLES OF ECONOMICS/BUSINESS ECONOMICS 2

  CONSUMPTION FUNCTION

  ACCORDING TO KEYNES CONSUMPTION IS A FUNCTION OF INCOME. THE AMOUNT OF MONEY THAT PEOPLE SPEND OUT OF NATIONAL INCOME ON THE PURCHASE OF GOODS AND SERVICES FOR THE DIRECT SATISFACTION OF THEIR WANTS IS CALLED AGGREGATE CONSUMPTION.

  PROPENSITY TO CONSUME:-REFERS TO SCHEDULE THAT SHOWS THE RELATIONSHIP BETWEEN DIFFERENT LEVELS OF CONSUMPTION AND DIFFERENT LEVEL OF INCOME.

  C=f(Y)

  TECHNICAL ATTRIBUTE OF PROPENSITY TO CONSUME

  AVERAGE PROPENSITY TO CONSUME:- RATIO OF CONSUMPTION EXPENDITURE TO ANY PARTICULAR LEVEL OF INCOME.

  AVERAGE PROPENSITY TO CONSUME =C/Y

  MARGINAL PROPENSITY TO CONSUME: IS THE RATIO OF CHANGE IN CONSUMPTION TO CHANGE IN THE INCOME

  MPC = Δ  C/Δ Y  IF INCOME IS 100 CONSUMPTION IS 70 AND THEN INCOME RISES TO 200 AND CONSUMPTION IS 130, MPC =60/100=.6

  DETERMINANTS

  SUBJECTIVE FACTORS:-WHICH RELATE TO PSYCHOLOGICAL CHARACTERISTICS OF HUMAN NATURE AND SOCIAL PRACTICES AND INSTITUTIONS. THESE FACTORS DETERMINE THE POSITION AND SLOPE OF CONSUMPTION CURVE

  OBJECTIVE FACTORS:-CHANGE IN CONSUMPTION CURVE

  SUBJECTIVE FACTORS

  INDIVIDUAL FACTORS:-

1. FARSIGHTEDNESS:-AS THE FUTURE IS UNCERTAIN SO PEOPLE SAVE  FOR FUTURE,
2. ECONOMIC INDEPENDENCE: SAVING IS DONE TO BECOME ECONOMICALLY INDEPENDENT
3. ENLARGED INCOME IN FUTURE:- FOR INVESTING SAVING AND EARNING MORE WEALTH
4. OCCUPATIONAL MOTIVE:- FOR STARTING A NEW BUSINESS PEOPLE SAVE MORE
5. BEQUEATHING A FORTUNE: FOR LEAVING HUGE WEALTH FOR FUTURE GENERATION
6. MISERLINESS: DUE TO MISERLINESS PEOPLE SPEND LESS
7. STATUS IN THE SOCIETY: FOR AMASSING WEALTH IN SOCIETY TO MAKE POSITION IN THE SOCIETY
8. PRECAUTIONARY MOTIVE:- TO MEET UP UNFORESEEN CONTINGENCIES

  BUSINESS FACTORS SUBJECTIVE FACTORS

1. EXTENSION OF BUSINESS:- MORE SAVING FOR THE PURPOSE OF EXPANSION
2. LIQUIDITY PREFERENCE: PREFER TO HOLD WEALTH IN CASH FORM AND CURTAIL THEIR CONSUMPTION EXPENDITURE
3. FINANCIAL PRUDENCE:- FOR REPLACEMENT OF OLD MACHINERY
4. MODERNIZATION: MORE SAVING TO FUND FOR MODERNIZATION
5. SUCCESSFUL MGMT  : WHO KEEPS LARGE FUNDS FOR MEETING UNCERTAINTY IN BUSINESS

6.     IN SHORT PERIOD PSYCHOLOGICAL FACTORS REMAIN STABLE

  OBJECTIVE FACTORS

1. CHANGE IN MONEY INCOME: DUE TO INCREASE IN INCOME CONSUMPTION ALSO INCREASE AND DUE TO DECREASE IN INCOME CONSUMPTION ALSO DECREASES
2. CHANGE IN REAL INCOME: DUE TO FALL IN THE PRICE OF THE GOODS REAL INCOME INCREASES. SO MORE SPENDING ON CONSUMPTION AND VICE VERSA
3. CHANGE IN DISTRIBUTION OF INCOME:IF DISTRIBUTION IS EQUAL,PROPENSITY TO CONSUME WILL BE MORE AND IF IT IS UNEQUAL THEN IT WILL BE LESS
4. WINDFALL GAINS AND LOSSES:-INCREASES AS WINDFALL GAIN OR DECREASES AS WINDFALL LOSS
5. FINANCIAL POLICY OF THE CORPORATIONS:_ IF THE PROFIT IS DISTRIBUTED AMONG SHAREHOLDERS THE PROPENSITY WILL INCREASE  VICE VERSA
6. CHANGE IN EXPECTATIONS:-IF PEOPLE FEAR THERE WILL BE WAR OR SHORTAGE OF GOODS,THEIR PROPENSITY WILL INCREASE DUE TO PURCHASING IN BULK.
7. FISCAL POLICY:-IF PROGRESSIVE TAXATION IS THERE IT WILL LEAD TO MORE EQUITABLE DISTRIBUTION OF INCOME AND  PROPENSITY WILL INCREASE

8. CHANGE IN THE RATE OF INTEREST
9. WAGES
10. LIQUID ASSETS
11. SOCIAL SECURITY AND LIFE INSURANCE
12. ATTRACTION OF NEW PRODUCTS
13. CREDIT AND INSTALLMENT FACILITIES
14. EXPECTATION OF FUTURE INCOME
15. AVAILABILITY OF GOODS
16. DEVELOPMENT OF THE MEANS OF TRANSPORT
17. CHANGE IN FASHION AND TASTES
18. CHANGE IN POPULATION
19. STABLE AND VARIABLE INCOME
20. MEASURE TO RAISE THE PROPENSITY TO CONSUME
21. REDISTRIBUTION OF INCOME
22. SOCIAL SECURITY
23. CREDIT FACILITIES
24. WAGE POLICY
25. INCREASE IN POPULATION
26. DEMONSTRATION EFFECT
27. MEASURE TO RAISE THE PROPENSITY TO CONSUME
28. URBANIZATION AND COLONIZATION
29. ADVERTISEMENT
30. MEANS OF TRANSPORT

  CRITICISM

1.       NO PROPER USE OF WORD PROPENSITY: CRITICIZED BY HAZLIT, PROPENSITY MEANS TENDENCY. BUT ACCORDING TO KEYNES IT IS GIVEN PART OF INCOME. IT DOES NOT MEAN THE ENTIRE INCOME OF EXPENDITURE OUT OF GIVEN INCOME. THE PART WHICH IS SPENT ON CAPITAL GOODS IS NOT INCLUDED IN CONSUMPTION

2.       SIMPLE TRUISM:- POOR PEOPLE HAVE MORE PROPENSITY TO CONSUME MORE THAN RICH.THIS FACT IS KNOWN TO EVERY ONE

3.       UNREALISTIC

4.       NOT SECULAR: ONLY APPLICABLE IN SHORT PERIOD

5.       FRAUD : VAGUE CONCEPT

  DUESENBERRY HYPOTHESIS

  PROF. DUESENBERRY HAS  EXPLAINED THE RELATIONSHIP BETWEEN SAVING AND CONSUMPTION WHICH IS KNOWN AS DUESENBERRY HYPOTHESIS.

  IT HAS TWO IMPORTANT PARTS:-

1.       PRESENT CONSUMPTION AND PREVIOUS STANDARD OF LIVING

2.       DEMONSTRATION EFFECT