FACTORS DETERMINANTS OF CONSUMPTION FUNCTION.


Meaning: -The factors determining consumption function (propensity to consume) can be broadly classified into two groups.

(A)     Subjective Factors: - The subjective factors are also called as endogenous factors. These factors are influenced by the psychology of human nature and the institutional arrangement of modern society. According to Keynes, there are 8 subjective motives that influence consumption function.
a.      Foresight (b) Avarice (greed) (c) calculation, (d) Enterprise, (e) Precaution, (f) improvement, (g) Pride, and independence. These subjective motives restrict individuals from spending their income.

(B)     Objective Factors influencing the consumption function: - The factors that influence the consumption function are as follow:
a.      Changes in net Income: -According to Keynes, as the income increases, the consumption too increases but in a lesser proportion.

b.      Price Level changes: - The consumption is inversely related to the price level. When the prices of the commodities increase, the purchasing power of the consumers declines and, as a consequence, the consumption decreases.

c.      Distribution of incomes: -An even distribution of income among the people will result in an overall increase in the consumption.

d.      Unexpected profits and losses: -The unexpected profits add to and the lowers force a reduction in the consumption.

e.      Degree of indebtedness: -The burden of debts and repayment of the borrowed funds along with interest force individual to reduce the expenditure on the consumption and vice versa.

f.       Credit facility: -Credit facilities and schemes like hire purchase system generate higher consumption demand for comport and luxury goods.

g.      Changes in Expectation: -Low-income and middle income group reduce consumption with a view to making provision for future.


h.      Saving Tendency: - The people with a conservative outlook try to save as much as possible from their income and thereby reduce consumption.

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