Consumption function is the relationship between consumption expenditure and disposable income. This concept was introduced by British economist John Maynard Keynes in 1936 terming it propensity to consume. Later, modern economist termed it as consumption function. It can be expressed as:
C = f (y)
C = Consumption
Y = Income
F = Functional relationship
Consumption expenditure of a nation depends upon the level of its national income. When income of the nation rises, the consumption also rises. Thus, the consumption function indicates a functional relationship between С and Y, where С depends on Y. Let’s understand consumption function with the help of an imaginary schedule.
The above table shows that when national income is Rs. 100 billion the national consumption is Rs. 150 billion. When national income rises from Rs. 100 billion to Rs. 200 billion the consumption also rises from Rs. 150 billion to Rs. 200 billion. When national income further rises from Rs. 200 billion to Rs. 300 billion the national consumption also rises from Rs. 200 billion to Rs. 250 billion. This is showing the relationship between income and consumption which is called consumption function.
Another thing that we can see from the above table is that at the lowest level of income the amount of consumption is greater than income. This is so because when people are very poor they may be forced to spend more than they earn merely to survive.
The consumption function can also be illustrated with the help of a diagram.
In the above diagram 2.6, the level of income on X-axis and the level of consumption on Y axis have been measured. CC curve represents consumption function. We can observe from the above diagram that when income is Rs. 100 billion the consumption is Rs. 150 billion. When income rises from Rs. 100 billion to Rs. 200 billion the consumption also rises from Rs. 150 billion to Rs. 200 billion. This is representing the relationship between income and consumption.
Deference Between Consumption and Consumption Function
Consumption function means entire schedule which shows different amount of consumption at every level of income. While consumption is that amount which is consumed at a particular level of income. Let’s understand with the given below table.