Question

# What is consumption function? What are its two types?                              OR What is saving function? What are its features?

Solution

## Consumption function shows the relationship between consumption and the various levels of income. As the income rises, consumption also rises. there is a direct relationship between consumption and income. It is written as: C=C0+bY  Consumption function has two types: (a) Autonomous consumption: It means that the level of consumption is independent of the changes in income. This is an amount of consumption which will take place even when the income is zero. In the equation, C0 is the autonomous consumption. (b) Induced consumption: It means the level of consumption which changes with the change in income. As the income rises, consumption also rises. In the equation, "bY' represents induced consumption.                                         OR Saving function shows the relationship between income and savings in the economy  S = f(y) where S = Saving, F = Function of and y = Income Features of saving function: (i) As income level increases, saving also increases. It passes through negative, zero and positive phases. (ii) At break-even level of income, savings are zero.  Before this level, savings are negative and after this level, it becomes positive.

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