CONSUMPTION FUNCTION

The consumption function is an element of aggregate demand. The consumption function explains the functional relationship between total expenditure and income(gross national income).

According to Keynes, consumption depends upon income. The higher the income higher will be consumption. Keynes has explained the consumption function in the ‘psychological law of consumption.

Mathematically consumption function is given by,
c= f(y) or,
c= a+cy

Where a= consumption when income is zero,

            c= marginal propensity to consume,

            y= income

DIAGRAM:

EXPLANATION:

1) X-axis represents consumption.

2) Y-axis represents income.

3) As income increases consumption also increases but at a diminishing rate.

4) Before point E consumption is more than income which leads to borrowing

5) At point E, income is equal to consumption

6) Beyond point E, income is more than consumption which leads to savings

Consumption plays important role in employment. As consumption increases aggregate demand rises which in turn leads to the generation of more employment.