Determinants/Factors of the Consumption Function:
There are a number of
determinants/factors both subjective and objective
which determine the position of consumption function. The factors or causes of
shifts in consumption function are as fallows:
(1) Subjective Factors:
Characteristics of Human Nature: The
subjective factors affecting propensity to consume are internal to
the economic system. The subjective factors include characteristics of human
nature, social practices which lead households to refrain or activate to
appending out of their income.
example, religious belief of the people towards spending, their foresight
attitude towards life, level of education, etc. etc., directly affect propensity
to consume or determine the slope and position of the consumptions curve. The
subjective factors do not undergo a material change over a short period of time.
These remain constant in the short run.
(2) Objective Factors:
objective factors are external to economic system. The
undergo rapid changes and bring market in the consumption function. The main
objective factors are as under:
(i) Real Income: Real income is the basic factor
which determines community’s propensity to consume. When real income of the
community increases, consumption expenditure also increases but by a smaller
amount. The consumption function shifts upward.
(ii) Distribution of wealth: If there is unequal distribution of
wealth in a country, the consumption function will also be unequal. People with
low income group have high propensity to consume and rich people low propensity
to consume. An equal distribution of wealth raises the propensity to consume.
(iii) Expectation Change in Price: If people expect prices are
going to rise in near future, they hasten to spend large sum out of a given
income just after the promulgation of first Martial Law in our country. So we
can say that when prices are expected to be high in future, the propensity to
consume increases or the consumption function shifts upward. When they are
expected to be low, the propensity to consume decreases or the consumption
function shifts downward.
(iv) Changes in Fiscal Policy: Taxes also play an important part
in influencing the propensity to consume. If the nature of taxes is such that
they directly affect the poor people and reduce their income, then the
propensity to consume is high and if rich persons are not taxed at a progressive
rate and they accumulate more wealth, then the propensity to consume is low.
(v) Change in the Rate of Interest: A change in the rate of
interest exercises influence on the propensity to consume. When the interest rate is raised, it generally induces
people to decrease expenditure and save more for lending purposes. On the other
hand, when the interest rate is reduced, it usually encourages expenditure as lending then becomes less attractive. So we conclude that an increase in the rate
of interest generally reduces propensity to consume or shifts the consumption
function downward and a fall in the rate of interest usually helps to the
increase of propensity to consume or shifts the consumption function upward.
(vi) Availability of Goods: Propensity to consume is also
affected by the availability of consumption goods. If the goods are available in
abundance, then the propensity to consume increases. If they are scarce and are
priced very high, then the propensity to consume will decline.
Credit Facilities: cheap credit facilities are available
in the country, the consumption function will move upward.
(viii) Higher Living Standard: If the real income of the people
increases in the country and people adopt the use of new produce like
television, washing machines, refrigerators, care, etc., etc., the consumption
function is high.
(ix) Stock of Liquid
Assets: If the consumer have greater amounts
of liquid assets; there will be more desire for the households to spend out of
disposable income. The consumption function shifts upward and vice versa.
(x) Consumer Indebtedness: In case the consumer are heavily
indebted and they pay bigger monthly installments to replay the dept, then
propensity to consume is low or the consumption function shifts downward and
Gains: If there are unexpected gains due to stock
market boom in the economy, it tends to shift the consumption function upward.
They are windfall gains. The unexpected losses in the stock market lead to the
downward shifting of the consumption curve.
Factors: The consumption function is also
influenced by demographic factors like size of family, occupations, place of
residence etc. Persons living in cities, for instance, spend more than those
living in rural areas.
Towards Saving: If a community is consumption
oriented, there will be less saving in the country. The consumption function
shifts upward. In case, people save more and spend less, then the consumption
function will shift downward.
Effect: If people are easily influenced by
advertisements on radio and television and seeing pattern of living of the rich
neighbors, the level of total consumption will go up.
How to Raise the
Propensity to Consume?
consume can raised by:
(i) Transferring wealth from rich to the poor.
Provision of cheap end easy credit facilities.
(v) Development of means of transport.
(vi) Urbanization and through