Karnataka 2nd PUC Economics Notes Chapter 10 Consumption and Investment Function
Consumption function:
→ The consumption function also called as propensity to consume refers to income consumption relationship. It is a functional relationship between Total consumption and Gross national income. The consumption function may be represented as follows:
→ C = f (Y). where C is consumption, Y is income and f is the functional relationship.
→ In fact, consumption function is a schedule ofthe various amounts of consumption expenditure corresponding to different levels of income.
Investment function:
→ Generally, investment means buying shares, stocks, bonds, securities existing in stock market. According to J.M.Keynes, investment refers to real investment which adds to capital stock. It leads to increase in level of income and production by increasing the investment.
Equality between Saving and Investment:
→ The equality between saving and investment is through the mechanism of rate of interest. If the saving is more than investment, the rate of interest falls, investment increases and savings comes down. When the saving is less than investment, rate of interest increases and investment comes down and the savings gets increased to the level of investment.
→ According to Keynes, Y = C + S and Y = C + I, therefore C + S = C + I, so S = I
- Y-income,
- C-consumption,
- S-savings,
- I-investment.
MPC-Marginal Propensity to Consume:
→ MPC (Marginal Propensity to Consume) refers to the ratio of change in consumption to the change in income. MPC = \(\frac{\Delta \mathrm{c}}{\Delta \mathrm{y}}\) where Δc refers to change in consumption and Δy refers to change in the income of consumer.
Multiplier:
→ Multiplier is the ratio of the total change in income to the initial change in investment. It expresses the quantitative relationship between increase in income and increase in investment.
APC-Average Propensity to Consumer :
→ APC-Average Propensity to Consumer is the ratio of consumption expenditure to income in a given period of time. APC = C/Y where C is consumption and Y is income.
MPS-Marginal Propensity to Save:
→ The Marginal Propensity to save (MPS) is obtained as follows:
MPS = 1 – MPC.