Write explanatory answer:
Explain the subjective and objective factors determining consumption function.
Explain the subjective and objective factors determining consumption function.
Factors Determining the Consumption Function:
There are
a number of determinants/factors both
subjective and objective which determine the position of consumption function.
The factors or causes of shifts in consumption function are as follows:
(1)
Subjective Factors:
(i)
Psychological Characteristics of Human Nature: The subjective factors affecting
propensity to consume are internal to the economic system. The subjective
factors include characteristics of human nature, social practices which lead
households to refrain or activate to appending out of their income.
For
example, religious belief of the people towards spending, their foresight
attitude towards life, level of education, etc. etc., directly affect
propensity to consume or determine the slope and position of the consumptions
curve. The subjective factors do not undergo a material change over a short
period of time. These remain constant in the short run.
(2)
Objective Factors:
The objective factors are
external to economic system. They undergo rapid changes and bring market in the
consumption function. The main objective factors are as under:
(i)
Real Income: Real income is the basic factor which determines
community’s propensity to consume. When real income of the community increases,
consumption expenditure also increases, but by a smaller amount. The
consumption function shifts upward.
(ii)
Distribution of wealth: If there is unequal distribution of wealth in
a country, the consumption function will also be unequal. People with low
income group have high propensity to consume and rich people low propensity to
consume. An equal distribution of wealth raises the propensity to consume.
(iii)
Expectation Change in Price: If people expect prices are going to rise
in near future, they hasten to spend large sum out of a given income just after
the promulgation of first Martial Law in our country. So we can say that when
prices are expected to be high in future, the propensity to consume increases
or the consumption function shifts upward. When they are expected to be low,
the propensity to consume decreases or the consumption function shifts
downward.
(iv)Changes
in Fiscal Policy: Taxes also play an important part in influencing the
propensity to consume. If the nature of taxes is such that they 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.
(v)
Change in the Rate of Interest: A change in the rate of interest
exercises influence on the propensity to consume. 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 lending then becomes less attractive. So we
conclude that 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.
(vi)Availability
of Goods: Propensity to consume is also affected by the availability
of consumption goods. If the goods are available in abundance, then the
propensity to consume increases. If they are scarce and are priced very high,
then the propensity to consume will decline.
(vii)
Credit Facilities: cheap credit facilities are available in the
country, the consumption function will move upward.
(viii)
Higher Living Standard: If the real income of the people increases in
the country and people adopt the use of new produce like television, washing
machines, refrigerators, care, etc., etc., the consumption function is high.
(ix)
Stock of Liquid Assets: If the consumer have greater amounts of liquid
assets; there will be more desire for the households to spend out of
disposable income. The consumption function shifts upward and vice versa.
(x)
Consumer Indebtedness: In case the consumers are heavily indebted and
they pay bigger monthly installments to replay the dept, then propensity to
consume is low or the consumption function shifts downward and vice versa.
(xi)
Windfall Gains: If there are unexpected gains due to stock market boom
in the economy, it tends to shift the consumption function upward. They are
windfall gains. The unexpected losses in the stock market lead to the downward
shifting of the consumption curve.
(xii)
Demographic Factors: The consumption function is also influenced by
demographic factors like size of family, occupations, place of residence etc.
Persons living in cities, for instance, spend more than those living in rural
areas.
(xiii)
Attitude towards Saving: If a community is consumption oriented, there
will be less saving in the country. The consumption function shifts upward. In
case, people save more and spend less, then the consumption function will
shift downward.
(ix)
Demonstration Effect: If people are easily influenced by
advertisements on radio and television and seeing pattern of living of the rich
neighbors, the level of total consumption will go up.
Factors Determining the Consumption Function:
There are a number of determinants/factors both subjective and objective which determine the position of consumption function. The factors or causes of shifts in consumption function are as follows:
(1) Subjective Factors:
(i) Psychological Characteristics of Human Nature: The subjective factors affecting propensity to consume are internal to the economic system. The subjective factors include characteristics of human nature, social practices which lead households to refrain or activate to appending out of their income.
For example, religious belief of the people towards spending, their foresight attitude towards life, level of education, etc. etc., directly affect propensity to consume or determine the slope and position of the consumptions curve. The subjective factors do not undergo a material change over a short period of time. These remain constant in the short run.
(2) Objective Factors:
The objective factors are external to economic system. They undergo rapid changes and bring market in the consumption function. The main objective factors are as under:
(i) Real Income: Real income is the basic factor which determines community’s propensity to consume. When real income of the community increases, consumption expenditure also increases, but by a smaller amount. The consumption function shifts upward.
(ii) Distribution of wealth: If there is unequal distribution of wealth in a country, the consumption function will also be unequal. People with low income group have high propensity to consume and rich people low propensity to consume. An equal distribution of wealth raises the propensity to consume.
(iii) Expectation Change in Price: If people expect prices are going to rise in near future, they hasten to spend large sum out of a given income just after the promulgation of first Martial Law in our country. So we can say that when prices are expected to be high in future, the propensity to consume increases or the consumption function shifts upward. When they are expected to be low, the propensity to consume decreases or the consumption function shifts downward.
(iv)Changes in Fiscal Policy: Taxes also play an important part in influencing the propensity to consume. If the nature of taxes is such that they 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.
(v) Change in the Rate of Interest: A change in the rate of interest exercises influence on the propensity to consume. 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 lending then becomes less attractive. So we conclude that 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.
(vi)Availability of Goods: Propensity to consume is also affected by the availability of consumption goods. If the goods are available in abundance, then the propensity to consume increases. If they are scarce and are priced very high, then the propensity to consume will decline.
(vii) Credit Facilities: cheap credit facilities are available in the country, the consumption function will move upward.
(viii) Higher Living Standard: If the real income of the people increases in the country and people adopt the use of new produce like television, washing machines, refrigerators, care, etc., etc., the consumption function is high.
(ix) Stock of Liquid Assets: If the consumer have greater amounts of liquid assets; there will be more desire for the households to spend out of disposable income. The consumption function shifts upward and vice versa.
(x) Consumer Indebtedness: In case the consumers are heavily indebted and they pay bigger monthly installments to replay the dept, then propensity to consume is low or the consumption function shifts downward and vice versa.
(xi) Windfall Gains: If there are unexpected gains due to stock market boom in the economy, it tends to shift the consumption function upward. They are windfall gains. The unexpected losses in the stock market lead to the downward shifting of the consumption curve.
(xii) Demographic Factors: The consumption function is also influenced by demographic factors like size of family, occupations, place of residence etc. Persons living in cities, for instance, spend more than those living in rural areas.
(xiii) Attitude towards Saving: If a community is consumption oriented, there will be less saving in the country. The consumption function shifts upward. In case, people save more and spend less, then the consumption function will shift downward.
(ix) Demonstration Effect: If people are easily influenced by advertisements on radio and television and seeing pattern of living of the rich neighbors, the level of total consumption will go up.
