1. Objective Factors:
Objective or economic factors (which undergo change in the short run) that influences consumption function are considered here:
(i) The Rate of Interest:
Classicists assumed that consumption or saving depends on the rate of interest. They believed that an increase in interest rate encourages saving and, thus, consumption is discouraged. Anyway, the rate of interest may not be considered as a significant factor influencing consumption decisions as empirical evidence suggests a weak link between the interest rate and consumption.
(ii) Sales Effort:
Advertising and various sales effort of producers of consumer goods are considered as a means for increasing consumer demand. It is quite likely that an increase or decrease in the amount of sales effort may lead to a greater or lower demand for consumer goods.
(iii) The Volume of Wealth:
The total wealth position of consumers is considered as an important determinant of consumption. Wealth like shares, bonds, house property, etc., influence consumption decisions. Owners of these assets do not have enough preference for these assets.
(iv) Terms of Consumer Credit:
The hire- purchase system of buying durable consumer goods has become popular in these days. However, such spending greatly depends on the terms and conditions of credit. If consumer credit is available on reasonable terms, some sort of spending spree will develop. However, it is agreed that the interest rate on installment buying is of relatively less significance than the size of required down-payments, the length of the period over which the balances must be repaid.
(v) Deferred Payment:
Sometimes, particularly during wartime, consumer spending declines due to restraint on spending. Once such restraints are removed, backlog of pent- up consumer demand might get exposure leading to a rise in spending.
2. Psychological Factors -
Keynes attached importance to the psychological or subjective factors which consist of basic values, attitudes, states of mind, etc. These are not quantifiable or specific like economic factors. Motives behind consumption, according to Keynes, are enjoyment, short-sightedness, generosity, miscalculation, extravagance and ostentation. However, these elements do not change significantly in the short run. Despite this, these subjective and cultural factors are capable of changing the shape and the level of the function.
Of all these subjective factors, expectations and attitudes of consumers do play an important role. Rational behaviour suggests that a consumer who expects a rise in income or in the price level may consume more than who expects no such change in near future. Again, among similar individuals (same age) with the same level of incomes, it may be found that some individuals consume more than others because of the differences in their attitudes towards thrift.
Further, in a status-symbol society, consumption spending is greatly influenced by the consumption pattern of the society in which the individual lives. “To keep up with the Joneses”, individuals imitate consumption patterns of their neighbours and workmates so that their status is not impaired.
Duesenberry calls such imitating consumption pattern “demonstration effect”.
3. Structural Factors:
The first important structural factor is income distribution. It is said that the marginal propensity to consume (MPC) is high of low- income families and low for high-income families. Thus, if there is a redistribution of income in favor of the poor-income families, aggregate consumption would rise since the MPC of these people is high.
Secondly, demographic factors are responsible for differences in consumption spending with identical incomes. Demographic factors include the size of family, stage in the family life cycle, place of residence, occupation, race, etc. It is true that large families or families with more children and aged persons consume more than small families. However, in the short-run analysis, these demographic factors can be ignored.
Fiscal Policy:
Tax-expenditure programmes of the government can influence consumer spending. If rich people are asked to pay more taxes and if these revenues are given as subsidies to poor people, aggregate consumption would rise. High taxes curtail consumption by reducing disposable income.
Now, if subsidies like flood relief, old- age pension, distribution of food grains at a subsidized rate, etc. are given definitely consumption spending of the recipient of these subsidies would rise. These are the people whose MPC is high. Thus, the tax-expenditure program shifts the consumption function through redistribution of income
