What is consumption function?  Consumption function shows what expenditure consumers will wish to make on consumer’s goods and services at each possible level of income

Determinants of consumption function Subjective factors Objective factors

Subjective factors  Farsightedness  Economic independence  Occupational motive  Miserliness  Status in society  Precautionary motive  Extension of business  Liquidity preference  Financial prudence  modernization

Objective factors  Change in money income  Change in real income  Windfall gains and losses  Expectations  Fiscal policy  Wages  Liquid assets  Attraction of new products  Availability of goods  Change in population  Duesenberry hypothesis

Psychological law of consumption  Assumptions-1)no change in psychological and institutional complex  2)normal conditions  3)laissez faire

Explanation

Importance of law  Importance to investment  Refutation of say’s law  Decline in MPC  Underemployment equilibrium  Over saving gap  Movement of trade cycles  Secular stagnation  State intervention  Inducement to invest

Measures to raise propensity to invest  Redistribution of income  Social security  Credit facilities  Increase in population  Demonstration effect  Advertisement  Means of transport

Criticism of propensity to consume  No proper use of propensity  Simple truism  Unrealistic  Not secular  It is a fraud