Consumption

Consumption refers to that part of total national income devoted to expenditure on final goods and services by individual consumers over a period of time (usually one year). It is seen as a function of income. It can be rewritten as:

C = f (Y) where Y = income 

This is often referred to as consumption function.

Determinants of Consumption

1. The level of income

2. The government policy regarding taxation

3. Income distribution (this affects average propensity to consume)

4. Expectation of high price level

5. Attitude towards saving

6. Population

Average Propensity to Consume (APC)

Average propensity to consume is the proportion of income devoted to consumption.  

It is calculated as: APC = \( \frac{Consumption, \: C}{Income, \: Y} \)

Marginal Propensity to Consume (MPC)

This is the proportion of change in income devoted to consumption. It is the relationship between change in consumption and change in income.

MPC = \( \frac{\Delta C}{\Delta Y} \)

a = autonomous consumption which takes place whether income is earned or not.