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.
C = c + bY where c=autonomous consumption, b = marginal propensity to consume, and Y = income.
The autonomous consumption is 60 crores and MPC = 0.6.
Now, derive the consumption from different level of income.
Income (Y)
(Rs. Crores) |
Consumption(C)
(Rs. Crores)
C=c¯+b(Y)C=c¯+b(Y) |
| 0 |
60(=60+0.6×0)60(=60+0.6×0) |
| 100 |
120(=60+0.6×100)120(=60+0.6×100) |
| 200 |
180(=60+0.6×200)180(=60+0.6×200) |
| 300 |
240(=60+0.6×300)240(=60+0.6×300) |
| 400 |
300(= 60+0.6×400) |
Production of goods and services, leading to increase in induced investment and hence, National Income. On the other hand, savings are considered as leakages from the circular flow of income by reducing consumption demand and hence production, investment and National Income also fall.
The point B in the diagram represents the break-even point where the consumption expenditure equals to the income.
