Question

Answer in detail.
Give an idea about the subjective factors determining consumption function.

Answer 1

Consumption function refers to the standard equation of consumption which defines the relationship between consumption and income where consumption value can be derived at each level with the use of income value.

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, sickness and other unforeseen contingencies related to economic insecurity. Hence, people try to save quite regularly. 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.