What is the Consumption Function?

Explanation

  • It suggests that revenue and the rate of increase or decrease in consumer spending are determined by income. This concept is not stable in the long run because income changes and consumption patterns change.This function is assumed to be balanced, and expenditures determine the income level. For a good concept to last long, it must be durable to reach equilibrium.

Consumption Function Formula

Below is the equation of the consumption function.

C – Total Consumption

c – Autonomous Consumption (minimum consumption for survival when income is zero).

  • Autonomous consumption is not influenced by income – We must understand that consumption can never be zero. If the earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more become zero, minimum consumption is never nullified. Such consumption is called autonomous consumption. If income is low, there is a minimum level of expenditure that is higher than the income. In such a case, consumption has to be maintained irrespective of income. The minimum level of consumption is said to be autonomous consumptionAutonomous ConsumptionAutonomous consumption refers to the consumption expenditure incurred by an entity on goods and services independent of income level.read more.Induced consumption (bY) (influenced by income) – bY; b is the marginal propensity to consumeMarginal Propensity To ConsumeMarginal Propensity to Consume refers to the increase in consumption owing to the increment in disposable income. It is determined as the ratio of change in consumption (ΔC) to change in disposable income (ΔI). read more (which means the consumption level increases for every rupee increase in the revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more). Induced consumption is influenced by income. Y indicates, i.e., income.Break-even point – When consumption expenditure reaches the income, it is called the break-even pointBreak-even PointBreak-even analysis refers to the identifying of the point where the revenue of the company starts exceeding its total cost i.e., the point when the project or company under consideration will start generating the profits by the way of studying the relationship between the revenue of the company, its fixed cost, and the variable cost.read more stage if there is no concept of saving.

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Examples

Let us deal with some examples to understand this concept in detail:

Calculate the consumption level Y= ₹1000 crores if the consumption function is C=200+0.5y?

Solution:

Use the below data for the calculation of total consumption: –

Total Consumption (C) will be: –

Consumption Function Calculator

You can use this calculator.

Consumption Function Formula= c + bY

0 + 0 * 0 = 0

Relevance and Uses

This article has been a Guide to Consumption Function and its definition. We discussed calculation with the consumption function examples, formulas, calculator, and downloadable Excel template. You can learn more about financial analysisFinancial AnalysisFinancial analysis is an analysis of finance-related projects/activities, company’s financial statements (balance sheet, income statement, and notes to accounts) or financial ratios to evaluate the company’s results, performance, and trends, which is useful for making significant decisions such as investment, project planning and financing activities.read more from the following articles: –

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