Determining factors of consumption function, Keynesian Subjective and Objective factors of Consumption Function or Keynesian Psychological Factors of Consumption Function?

WELCOME

I  heartily welcome you to read about the various factors which are responsible to save income and to determine the level of aggregate consumption. It is Macro Economics so, all the concepts are considered as aggregate (Total) values. 

Consumption function

The concept of consumption function is introduced by J.M Keynes a British economist. That's why it is also called as "Keynesian consumption function". according to Keynes it is useful to find out the aggregate values of consumption and expenditure in an economy and to predict based on available data. 

Consumption function refers to the functional relationship between total consumption and the total national income when other things remains constant. This can be expressed as a mathematical formula:

C = f(Y)

where

• C refers to the total consumption.
• f refers to the functional relationship 
• Y refers to the income or disposable income.

classification of determinant factors

J.M Keynes classified the determinants of consumption into 2 main categories. they are:

• Subjective factors
• Objective factors.

The factors which are determining the consumption function are also equally applicable for determining saving function.

Subjective factors

subjective factors includes the psychological features of human nature and behaviour.  they are completely personal that means purely depends on the individual will and preferences.

these are:

• Precautionary motives: precautionary refers to the preventive measures. people save some part of income as precautionary motive (Preventive measures) such as illness, unemployment, accidence and for  other problems.
• future needs: to meet future needs which includes education expenditure, for marriages etc.
• To increase the level of future income: refers to the savings for investment to earn more income in the future.
• social status (Social prestige): acquiring huge wealth increases social status which is responsible to save the income.
• speculative projects
• Property: To increase property for next generation for the sake of heirs and children in his family.
• attitude: includes his habits and miserly behaviour which is responsible to save more of income. more income gives more satisfaction and vice versa. It is purely psychological.

subjective factors are also influenced by the behaviour of government and the business. They are:

• enterprise: to make more investment to grow.
• liquidity: to pay for emergencies and difficulties.
• management: to run the management successfully.
• to repay firm's debts.

objective factors

apart from subjective factors, Keynes listed few objective factors which are responsible to change the level of consumption.

• General price level: an increase in general price level reduces consumption because money (Monetary) value decreases. purchasing power of money decreases.
• Fiscal policy: Fiscal policy is also called as taxation policy. if the taxes imposed by  the governments are high; the level of consumption are low and vice versa. as a result it effects propensity to consume. 
• Rate of interest
• Stock of wealth.
• Credit conditions: Refers to the availability of credit facility. they also effects the level of consumption 
• Consumer indebtedness: if a consumer repays more debts; the consumption will be more.
• Distribution of income in the economy: if the income distribution is more favourable for rich, he saves more money which increases propensity to save. if the income distribution is more favourable to poor and middle classes, it will result in the increase in consumption. 
• Gains and losses of share values: if the prices of shares rises, consumption of share holders increases and vice versa. 
• Speculation: It refers to general conclusion without any evidence. if people expect to rise in the prices, they will spent more on the goods to meet future needs and this increases consumption. if they expect decrease in prices; they will reduce current consumption to spend the money when there is more decrease in the prices in future.
• Money illusion: It is also called as price illusion. Money illusion is an economic theory. When there is change in prices of goods and services and his real income is constant; he also changes the level of consumption. he generally doesn't recognizes the change in the value of market prices but he creates an illusion that expenditure is going high. That's why the reason it is a cause for change in consumption.

Keynes conclusion

according to Keynes the consumption will not change in short - run. The propensity to consume I.E. natural behaviour of a person in relation to consumption will not change in short run because, It is more depends on the psychological and institutional (Business( factors. They cannot change easily in short - run. the institutional factors are the main responsible for the distribution of income in the country which influences the level of consumption and savings.

Key terms for sweet memory

I decided to write a short meaning of few different words which are not regular in Economics.

• Consumption: The amount of disposable income or available income which is used to pay and satisfy wants.
• Income distribution: It is the distribution of income to different groups for participating or contributing in production process. It's reward.
• Attitude: A constant way of thinking. based on habits and environment.
• Psychological (PSYCHOLOGY): study of mind and behaviour. 
• Savings: The part of income which is not used for consumption.
• saving function: aggregate value of total consumption and national income together.
• consumption function: aggregate value of consumption and national income.
• Inflation: a rise in general price level. deficiency in supply according to demand.

------------------------------

The end

Thanks for reading. Hope my work is helpful to you.