Determinants of consumption function, Managerial Economics

Other Determinants

1.          Rate of Interest

Is contained in the argument of the classified economists who argued that rational consumers will save more and consume less if the rate of interest is high.

2.         Relative Prices

Influences the aggregate consumption.  If relative prices are high, the level of consumption will be low

3.         Capital Gains

Keynes observed that there is a possibility of windfall gains or losses influencing consumption.  He says consumption of the wealth owning group may be extremely susceptible to unforeseen changes in the money value of their wealth.  This is true of the stock minded speculative economy.

4.         Wealth

The possession of liquid assets influences the amount that you have to save.  It stems from the Diminishing Marginal Utility of Wealth.  The larger the stock of wealth, the lower its Marginal Utility and consequently the weaker the desire to add to future wealth by curtailing present consumption.

In this case, the more wealth an individual has, the weaker will be the desire to accumulate still more savings at that particular time.

5.         Money Stock or Liquid Assets:

Possession of liquid assets boosts consumption in that they can be changed into cash and thus consumed.

6.         Availability of Consumer Credit:

Normally influences spending of the consumer of durables.

7.         Attitudes and Expectations of the Consumer

A change in the consumer attitudes will affect consumer behaviour.  The expectations attained by the consumer about income increases will affect the consumer behaviour.  If in the face of price increases they expect further price increases; they shall increase their purchases further.  N.B. These things might be true of an individual, but not the [aggregate] society.

8.         The money Illusion

Some people look at money at the face value.  Consumption will be affected if customers are subject to money illusion.  The phenomenon of Money illusion occurs when despite proportional changes in the prices of goods and services and then their money incomes which keeps real incomes unchanged, consumers make a change in their real consumption pattern.  It is know as Pigou Effect which talks of real balance.  With a change in nominal income, people behave in the same way as though their real income has gone up.

Suppose price and Money Income increases by 10%, for the families which regard their real income unchanged and do not suffer from money illusion they would take their real incomes as unchanged and would only increase their consumption by 10%.

9.         Distribution of Income

If the Marginal Propensity to consume among the poor is high, then redistribution of wealth from the rich to the poor leads to higher consumption.

10.        Composition of the Population:

In sex and age.

Posted Date: 11/28/2012 6:22:18 AM | Location : United States

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