consumption function is influenced by various factors. consumer's propensity to spend, different situations, exhibition influence, etc. are the factors that influence the consumption function. analyzed the factors that determine the consumption function by dividing them into the following two sections:
1. subjective factors 2. objective factors
these subjective and objective factors can be explained ad follows:
1. subjective factors
subjective factors are also known as psychological factors because these are internal factors that determine the consumption function. these factors are related to human behavior and habits, social customs and traditions. by these factors the behavior of individuals as well as the behaviors of the entrepreneurs are influenced. in this manner, subjective factors are also divided into two parts viz. individual motives and business motives.
(a) individual motives
people cut down their consumption due to various individual reasons. such changes in consumption affects the consumption function in various ways. individual motives are divided into the following eight parts:
1. motive of foresightedness
people cut down their current consumption for the sake of their children future. this will result in the decrease in consumption function.
2. motive of precaution
people cut down their current consumption in order to tackle the miss happenings in the future.
3. motive of improvement
some people cut down their current consumption in order to improve their future life style. this will also reduce the current consumption.
4. motive of independence
some people improve their future life styles by reducing current consumption. this will also reduce current consumption vecause people are of the concept that they would be independent on the future. consumption function decrease in this manner also.
5. motive of pride
people are of the motive of retaining their pride in the future by maintaining a good economic status of their children with the reduction in current consumption. this will also reduce the consumption function.
6. motive of enterprise
some people even cut down their current consumption in order to save for the required investment in establishing an enterprise in the future. in this situation also the consumption function will be reduced.
7. motive of avarice
some people do not spend even in the necessary situation due to avarice as a result consumption function will decrease.
8. motive of calculation
there are some people in the society who calculate interest, profit,etc. fro their saving. so, such people will cut. down their present consumption to save for earning interests, profits,etc. in the future. such people will reduce their consumption function.
(b) business motives
among various factors determining the consumption function business motive is also one. due to business motives the individuals and the government cut down their current consumption. the business motive can be explained as follows:
1. motive of enterprise
some people come forward facing the risks to carry out the business activities. such, people cut down their current consumption to increase the savings that will be required for the development and expansion of their business in the future.
2. motive of liquidity
some entrepreneurs cut down their current consumption to increase the saving for liquidity that may be required to solve the problems that arise while running the business. this will also result in the decrease in consumption function.
3. motive of income improvement
any enterprising will required a huge amount of capital to increase the income. so, to increase work efficiency the current consumption is cut down. this will also decrease the propensity to consume.
4. motive of financial prudence
some entrepreneurs are farsighted and they cut down their current consumption for new investments in the future. to run the financial business also they cut down their current consumption. this will also result in the decrease in consumption function.
2. objective factors
factors determining consumption function are such exogenous factors which sometimes bring about changes quickly and some other times bring about changes very slowly. some of such factors are as follows:
(a) fiscal policy
change in fiscal policy by the government brings about the changes in consumption and income. of the government increases the tax rate through fiscal policy then disposable income will decrease. this will result in the decrease in consumption. in contrary to this, if the government reduces the tax rate through fiscal policy, then the disposable income will increase, increasing the propensity to consume.
(b) windfall gains or losses
future expectations also affect the propensity to consume. if gains increase unexpectedly then consumption will also increase and if losses increase unexpectedly, then propensity to consume will decrease.
(c) future expectations
future expectations also affect the propensity to consume. due to possibility of rise in price in the future or possibility of war, the current demand for goods will increase. but contrary to this. if there is a possibility of decrease in price in the future, then current demand for goods will decrease.
(d) rate of interest
rate of interest also determines the consumption function. if the rate of interest increases then people will start saving. as a result current consumption will decrease . on the other hand, if the rate of interest decreases, then the people won't be in favour of saving. this will result in the increase in the propensity to consume.
(e) distribution of income
if the national income is equally distributes then the propensity to consume will be less. in such a situation, the income of people won't increase in high proportion. in contrary to this, if the national income is distributed unequally, then most part of the national income will be in the hands of rich people and their propensity to consume will be low. in such a situation there won't be a possibility for the increase in income of the poor people.
due to changes in these various factors the changes in the income of people will be resulted, and changes in the propensity to consume will occur. therefore, income is taken as the main factor that affects the propensity of consume. other factors are taken to have uncertain effects. these effects are effective only in the long run.
1. subjective factors 2. objective factors
these subjective and objective factors can be explained ad follows:
1. subjective factors
subjective factors are also known as psychological factors because these are internal factors that determine the consumption function. these factors are related to human behavior and habits, social customs and traditions. by these factors the behavior of individuals as well as the behaviors of the entrepreneurs are influenced. in this manner, subjective factors are also divided into two parts viz. individual motives and business motives.
(a) individual motives
people cut down their consumption due to various individual reasons. such changes in consumption affects the consumption function in various ways. individual motives are divided into the following eight parts:
1. motive of foresightedness
people cut down their current consumption for the sake of their children future. this will result in the decrease in consumption function.
2. motive of precaution
people cut down their current consumption in order to tackle the miss happenings in the future.
3. motive of improvement
some people cut down their current consumption in order to improve their future life style. this will also reduce the current consumption.
4. motive of independence
some people improve their future life styles by reducing current consumption. this will also reduce current consumption vecause people are of the concept that they would be independent on the future. consumption function decrease in this manner also.
5. motive of pride
people are of the motive of retaining their pride in the future by maintaining a good economic status of their children with the reduction in current consumption. this will also reduce the consumption function.
6. motive of enterprise
some people even cut down their current consumption in order to save for the required investment in establishing an enterprise in the future. in this situation also the consumption function will be reduced.
7. motive of avarice
some people do not spend even in the necessary situation due to avarice as a result consumption function will decrease.
8. motive of calculation
there are some people in the society who calculate interest, profit,etc. fro their saving. so, such people will cut. down their present consumption to save for earning interests, profits,etc. in the future. such people will reduce their consumption function.
(b) business motives
among various factors determining the consumption function business motive is also one. due to business motives the individuals and the government cut down their current consumption. the business motive can be explained as follows:
1. motive of enterprise
some people come forward facing the risks to carry out the business activities. such, people cut down their current consumption to increase the savings that will be required for the development and expansion of their business in the future.
2. motive of liquidity
some entrepreneurs cut down their current consumption to increase the saving for liquidity that may be required to solve the problems that arise while running the business. this will also result in the decrease in consumption function.
3. motive of income improvement
any enterprising will required a huge amount of capital to increase the income. so, to increase work efficiency the current consumption is cut down. this will also decrease the propensity to consume.
4. motive of financial prudence
some entrepreneurs are farsighted and they cut down their current consumption for new investments in the future. to run the financial business also they cut down their current consumption. this will also result in the decrease in consumption function.
2. objective factors
factors determining consumption function are such exogenous factors which sometimes bring about changes quickly and some other times bring about changes very slowly. some of such factors are as follows:
(a) fiscal policy
change in fiscal policy by the government brings about the changes in consumption and income. of the government increases the tax rate through fiscal policy then disposable income will decrease. this will result in the decrease in consumption. in contrary to this, if the government reduces the tax rate through fiscal policy, then the disposable income will increase, increasing the propensity to consume.
(b) windfall gains or losses
future expectations also affect the propensity to consume. if gains increase unexpectedly then consumption will also increase and if losses increase unexpectedly, then propensity to consume will decrease.
(c) future expectations
future expectations also affect the propensity to consume. due to possibility of rise in price in the future or possibility of war, the current demand for goods will increase. but contrary to this. if there is a possibility of decrease in price in the future, then current demand for goods will decrease.
(d) rate of interest
rate of interest also determines the consumption function. if the rate of interest increases then people will start saving. as a result current consumption will decrease . on the other hand, if the rate of interest decreases, then the people won't be in favour of saving. this will result in the increase in the propensity to consume.
(e) distribution of income
if the national income is equally distributes then the propensity to consume will be less. in such a situation, the income of people won't increase in high proportion. in contrary to this, if the national income is distributed unequally, then most part of the national income will be in the hands of rich people and their propensity to consume will be low. in such a situation there won't be a possibility for the increase in income of the poor people.
due to changes in these various factors the changes in the income of people will be resulted, and changes in the propensity to consume will occur. therefore, income is taken as the main factor that affects the propensity of consume. other factors are taken to have uncertain effects. these effects are effective only in the long run.
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