1
Question
Explain the subjective and objective factors determining consumption function.
Open in App
Solution
According to Keynes, consumption function is affected by (1) Subjective (Psychological) factors (2) Objective (Institutional) factors.
(I) Subjective Factors or Psychological Factors: The subjective factors which affect the propensity to consumer consists of those psychological motives, which induce individuals to refrain from spending. These psychological factors which makes individuals to save more are:
(1) Motive of Precaution: Generally, people save to meet unexpected contingencies such as accidents, illness etc.
(2) Motive of Foresight: Individuals save more to provide for anticipated requirement in future such as old age, education of children, etc,
(3) Motive of Calculation: In order to earn income people invest in shares, debentures. This reduces their present consumption.
(4) Motive of Improvement: To enjoy a improved standard of living in future, people save more.
(5) Motive of Independence: People want to have financial independence and freedom, so they save more now and consume less.
(6) Motive of Enterprise: To set up business or to expand the business in future people save more and spend less.
(7) Motive of Pride: Individuals take pride in leaving money and wealth for their children. So they will accumulate money by savings.
(8) Motive of Avarice: If people are miserly by temperature they will save more and consume less.
(II) Objective Factors or Institutional Factors: They are external to individual behaviour. Important objective factors, which cause changes in the nature, shape and position of consumption function are as follows:
(1) Change in Income: There is a direct and positive relation between income and consumption.
(2) Change in rate of interest: If rate of interest rise people will consume less and save more in order to gain from higher rate of interest.
(3) Windfall gains or losses: Unexpected gains like a lottery prize increase the income and hence their consumption increases. Similarly, sudden loss will reduce consumption.
(4) Fiscal Policy: The Fiscal Policy of the government relating to Income tax, capital gain tax, etc. have significant effect on consumption function.
(5) Demographic Factors: There is variation in consumption expenditure due to demographic factors, which include factors like the size of the family, occupation, place of residence, etc. Large families spend more than small families, urban families spend more than rural families.
(6) Future Expectations: Future expectations about availability of goods, prices, income, etc. influence the consumption pattern. If future income is expected to increase people are likely to consume more and save less.
(7) Burden of Debt: If the burden of debt is more the propensity to consume would be less and vice versa.
(8) Social Security Benefits: Increase in government social security benefits like pensions, health, insurance etc. will increase consumption expenditure.
(9) Change in Disposable Income: Consumption expenditure depends on disposable income. If disposable income changes due to tax then consumption expenditure will change.
(10) Change in Depreciation Allowance: Increase in depreciation allowance would reduce income of shareholders and consumption.
(I) Subjective Factors or Psychological Factors: The subjective factors which affect the propensity to consumer consists of those psychological motives, which induce individuals to refrain from spending. These psychological factors which makes individuals to save more are:
(1) Motive of Precaution: Generally, people save to meet unexpected contingencies such as accidents, illness etc.
(2) Motive of Foresight: Individuals save more to provide for anticipated requirement in future such as old age, education of children, etc,
(3) Motive of Calculation: In order to earn income people invest in shares, debentures. This reduces their present consumption.
(4) Motive of Improvement: To enjoy a improved standard of living in future, people save more.
(5) Motive of Independence: People want to have financial independence and freedom, so they save more now and consume less.
(6) Motive of Enterprise: To set up business or to expand the business in future people save more and spend less.
(7) Motive of Pride: Individuals take pride in leaving money and wealth for their children. So they will accumulate money by savings.
(8) Motive of Avarice: If people are miserly by temperature they will save more and consume less.
(II) Objective Factors or Institutional Factors: They are external to individual behaviour. Important objective factors, which cause changes in the nature, shape and position of consumption function are as follows:
(1) Change in Income: There is a direct and positive relation between income and consumption.
(2) Change in rate of interest: If rate of interest rise people will consume less and save more in order to gain from higher rate of interest.
(3) Windfall gains or losses: Unexpected gains like a lottery prize increase the income and hence their consumption increases. Similarly, sudden loss will reduce consumption.
(4) Fiscal Policy: The Fiscal Policy of the government relating to Income tax, capital gain tax, etc. have significant effect on consumption function.
(5) Demographic Factors: There is variation in consumption expenditure due to demographic factors, which include factors like the size of the family, occupation, place of residence, etc. Large families spend more than small families, urban families spend more than rural families.
(6) Future Expectations: Future expectations about availability of goods, prices, income, etc. influence the consumption pattern. If future income is expected to increase people are likely to consume more and save less.
(7) Burden of Debt: If the burden of debt is more the propensity to consume would be less and vice versa.
(8) Social Security Benefits: Increase in government social security benefits like pensions, health, insurance etc. will increase consumption expenditure.
(9) Change in Disposable Income: Consumption expenditure depends on disposable income. If disposable income changes due to tax then consumption expenditure will change.
(10) Change in Depreciation Allowance: Increase in depreciation allowance would reduce income of shareholders and consumption.
Suggest Corrections
0
Similar questions