Answer in detail.
What are the objective factors influencing consumption function.
What are the objective factors influencing consumption function.
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 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.
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 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.
