Consumption Function and Law of Consumption from Managerial Economics

Consumption function is the basic theories given in Macro economics. We already have discussed about the theory of consumers surplus and analysis of market structure. Now, we will raise a debate on consumption function and law of consumption. The theory is taken from Managerial Economics book of SMU. It is MB0026 book code of Sikkim Manipal University for MBA.

Psychological Law of Consumption:

Consumption means using goods and services for satisfying current wants. We spend major portion of our income on consumption. Consumption expenditure means house hold spending, which satisfies our immediate wants. Under this section, we will study the relationship between consumption and income. The pattern of consumption expenditure for all families is more or less the same. We can see that families have tendencies to increase consumption with increase in income. This relationship between consumption and income is called consumption function. Consumption is a function of income.

C = f(Y)

C – Consumption

f – Function

Y- Income



C = a+bY

C – Consumption

A – The level of consumption which will exist when the income is 0

bY – Consumption income ratio or APC

MPC

Marginal Propensity to Consume is the ratio of change in total consumption to change in total income.

It says that when income increases, the consumption will increase, but less than the increase in income. This is called the Psychological law of consumption. People do not consume all the increase in income in the current period, because they have to save for their future. This consumption behavior of a family helps us to understand community behavior. J. M. Keynes introduced the concept of consumption function at macro level as aggregate consumption function. The theory of consumption and law of consumption will help you in the analysis of business and market. It is the analysis of the managerial economics.