Consumption and Saving function

Consumption Function:

The consumption function or propensity to consume refers to the income consumption relationship. It is a "functional relationship between two aggregates, i.e., total consumption and gross national income". Symbolically, the relationship is represented as C = f (Y), where C is consumption, Y is income, and f is the functional relationship.

Thus the consumption function indicates a functional relationship between C and Y, where C is dependent and Y is the independent variable, i.e., C is determined by Y'  This relationship is based on the ceteris paribus (other things being equal) assumption, as such only, the income consumption relationship is considered and all possible influences on consumption are held constant.

Income, Y (Rs in Crores)	Consumption, C=f(Y)
0	20
60	70
120	120
180	170
240	220
300	270
360	320

Table 1 exhibit the consumption schedule shows that consumption is an increasing function of income because consumption, expenditure increases with an increase in income. Here it is shown that when income is zero during the depression, people spend out of their past savings on consumption because they must eat to live.

In the diagram showing the consumption curve, income is measured horizontally, and consumption is measured vertically. 45° is the unity-line where at all levels, income and consumption are equal. The C curve is a linear consumption function based on the assumption that consumption changes by the same amount (Rs 50 crores). Its upward slope to the right indicates that consumption is an increasing function of income. B is the break-even point where C = Y or . When income rises to  consumption also increases to , but the increase in consumption is less than the increase in income. The portion of income not consumed is saved as shown by the vertical distance between the 45° line and C curve, i.e., . 

Properties or Technical Attributes of Consumption Function:

The consumption function has two technical attributes or properties:

1. The Average propensity to Consume: The average propensity to consume may be defined as the ratio of consumption expenditure to any particular level of income. It is found by dividing consumption expenditure by income, or APC = C/Y. It is expressed as the percentage or proportion of income consumed. The table below shows that APC declines as income increases because the proportion of income spent on consumption decreases.

2. The Marginal Propensity to Consume: The marginal propensity to consume may be defined as the ratio of the change in consumption to the change in income or as the rate of change in the average propensity to consume as income changes. It can be found by dividing change in consumption by a change in income, or MPC = ΔC/ΔK. The MPC is constant at all levels of income, as shown in the table below.

Income, Y	Consumption, C=f(Y)	APC = C/Y	MPC=ΔC/ΔK
120	120	1 or 100%	-
180	170	0.92 or 92%	0.83 or 83%
240	220	0.91 or 91%	0.83 or 83%
300	270	0.90 or 90%	0.82 or 82%
360	320	0.88 or 88%	0.83 or 83%

Saving Function:

Saving is defined as the excess of income over consumption expenditure. The concept of saving is closely related to the concept of consumption. Saving is the part of income that is not consumed. Generally, as the level of income increase, saving also increases and vice versa.

We know, Y = C + S; Thus, S = Y - C; Where, Y = Income; S = Saving; C = Consumption

Saving function or the propensity to save expresses the relationship between saving and the level of income. It is simply the desire of the households to hoard a part of their total disposable income. Symbolically, the functional relation between saving and income can be defined as S = f(Y).

Income (Y)	Consumption (C)	Saving (S)
0	20	-20
60	70	-10
120	120	0
180	170	10
240	220	20

A direct relationship exists between saving and income. This means, if income increases, saving also increases but in less proportion in comparison to income. Conversely, when the income level is low, saving is negative. In the initial stages, when income is low, consumption expenditure is more than the level of earning, so there is no saving .i.e. dis-saving.

Properties or Technical Attributes of Saving Function:

Saving function or propensity to save has two major attributes:

1. Average Propensity to Save (APS): The average propensity to save is a relationship between total saving and total income in a given period of time. It is the ratio of saving to income that shows the portion of the income that people saved. Symbolically, APS = S/Y. Where, S = Saving; Y = Income

For example, from the table below, when the disposable income is 180, consumption is 170, and saving is 10, we can calculate APS as APS = 10/180 =0.06 or 6%. This shows that out of total income in a year, 6 % will be saved after spending on consumption.

2. Marginal Propensity to Save (MPS): The marginal propensity to save or MPS refers to the increase in the proportion of saving as a result of an increase in the level of income. It can be defined as the ratio of change in saving to change in income. Symbolically, MPS = ΔS/ΔY. Where, ΔS = Change in saving; ΔY = Change in income.

For example, from the table below, when income increased from 180 to 240, savings also changed from 10 to 20. We can then calculate MPS as MPS= 10/60 =0.17 or 17%. This shows that, when income increased, the proportion of savings also increased. Thus, the saving made out of total income is 17%.

Income (Y)	Consumption (C)	Saving (S)	APS = S/Y	MPS = ΔS/ΔY
0	20	-20	-	-
60	70	-10	-	-
120	120	0	0	-
180	170	10	0.06=6%	0.17=17%
240	220	20	0.08=8%	0.17=17%

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