Answer in detail.
Explain Keynes subjective and objective factors influencing consumption function.
Explain Keynes subjective and objective factors influencing consumption function.
The subjective factors that
determine the consumption function are usually psychological factors
only:
1.
Demonstration Motive: If consumers are influenced by the consumption of other
people and try to adopt similar consumption practices, such practices are known
as demonstration effect. If the people of a country are affected by the demonstration
effect, then the propensity to consume will be high and if not affected by the
demonstration effect, then the propensity to consume will be low.
2. Security
Motive: The families and individuals in the modern industrialized societies are
highly conscious with old age and other unforeseen contingencies
related to economic insecurity. Hence, people try to save regularly a part of their income. Such
savings reduce the consumption function.
3. Improvement and
Development Motive: Improvement
and development motives of the country and individuals also influence the
pattern of consumption function. If the people would like to develop and
improve their life and society, then they are ready to sacrifice a part of
their present consumption. Therefore, they will save for future to enhance
their quality of life and vice-versa.
The objective factors that influence consumption function
are:
1. Real income: When real income of the community increases,
consumption expenditure also increases but by a smaller amount.
2. Expectation change in price:
If prices are expected to be high in future, the propensity to
consume increases or the consumption function shifts upward.
3. Changes in fiscal: If taxes 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.
4. Distribution of income and wealth: People
with low income group have high propensity to consume and rich people will have
low propensity to consume. An equal distribution of wealth raises the
propensity to consume.
5. Change in the
rate of interest: 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
savings becomes less attractive due to decreased rate. So 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.
The subjective factors that determine the consumption function are usually psychological factors only:
1. Demonstration Motive: If consumers are influenced by the consumption of other people and try to adopt similar consumption practices, such practices are known as demonstration effect. If the people of a country are affected by the demonstration effect, then the propensity to consume will be high and if not affected by the demonstration effect, then the propensity to consume will be low.
2. Security Motive: The families and individuals in the modern industrialized societies are highly conscious with old age and other unforeseen contingencies related to economic insecurity. Hence, people try to save regularly a part of their income. Such savings reduce the consumption function.
3. Improvement and Development Motive: Improvement and development motives of the country and individuals also influence the pattern of consumption function. If the people would like to develop and improve their life and society, then they are ready to sacrifice a part of their present consumption. Therefore, they will save for future to enhance their quality of life and vice-versa.
The objective factors that influence consumption function are:
1. Real income: When real income of the community increases, consumption expenditure also increases but by a smaller amount.
2. Expectation change in price: If prices are expected to be high in future, the propensity to consume increases or the consumption function shifts upward.
3. Changes in fiscal: If taxes 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.
4. Distribution of income and wealth: People with low income group have high propensity to consume and rich people will have low propensity to consume. An equal distribution of wealth raises the propensity to consume.
5. Change in the
rate of interest: 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
savings becomes less attractive due to decreased rate. So 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.
