Factor Affecting Consumption Function

Factor affecting consumption function is as follows:

1. Subjective Factors:

Keynes states that the subjective factors which determine the slope and position of the consumption function including two things:

(A) Psychology of Human Nature:

The subjective factors affecting the propensity to consume are internal to the economic system. The subjective factors include characteristics of human nature, social practices that lead households to refrain or activate to appending out of their income. Following motive which lead the individuals to refrain from spending out of their incomes.
a. People are motived to build the reverse for unforeseen contingencies such as illness, unemployment, accidents, etc.
b. People are induced to save for providing the anticipated future needs such as education of the children, social processions, retirements, etc.
c. People are also motivated to accumulate large wealth to get higher social or political status.
d. Many people think that the accumulation of more wealth gives them great psychic satisfaction.

(B) Institutional Arrangements:

Subjective factors also include the behavior of business corporations and governments. Keynes listed the following four motives for an accumulation of business firms and governments.
a. Business firms are induced to save a part of their income so that they can make the investment in new enterprises to carry out expansion in the future.
b. Managers of the business firms are also induced to save more because they want to prove themselves, successful managers.
c. Business firms also make their initiation to accumulate more because of facing emergencies.
d. Firms also express the desire to save more because of ensuring adequate financial provision against depreciation and obsolescence and repayment of debt.

2. Objective Factors:

The objective factors are external to the economic system. They undergo rapid changes and bring the market in the consumption function. The main objective factors are as under:
(i) Real Income: Real income is the basic factor that determines the community’s propensity to consume. When the real income of the community increases, consumption expenditure also increases but by a smaller amount. The consumption function shifts upward.
(ii) Distribution of wealth: If there is an unequal distribution of wealth in a country, the consumption function will also be unequal. People with low-income groups have a high propensity to consume and rich people’s low propensity to consume. An equal distribution of wealth raises the propensity to consume.
(iii) Expectation Change in Price: If people expect prices are going to rise in near future, they hasten to spend large sum out of a given income just after the promulgation of first Martial Law in our country. So we can say that when prices are expected to be high in the future, the propensity to consume increased or the consumption function shifts upward. When they are expected to be low, the propensity to consume decreases or the consumption function shifts downward.
(iv)Changes in Fiscal Policy: Taxes also play an important part in influencing the propensity to consume. If the nature of taxes is such that they directly affect the poor people and reduce their income, then the propensity to consume is high and if rich persons are not taxed at a progressive rate and they accumulate more wealth, then the propensity to consume is low.
(v) Change in the Rate of Interest: A change in the rate of interest exercises influence on the propensity to consume. When the interest rate is raised, it generally induces people to decrease expenditure and save more for lending purposes. On the other hand, when the interest rate is reduced, it usually encourages expenditure as lending then becomes less attractive.
(vi)Availability of Goods: The propensity to consume is also affected by the availability of consumption of goods. If the goods are available in abundance, then the propensity to consume increases. If they are scarce and are priced very high, then the propensity to consume will decline.
(vii) Credit Facilities: Cheap credit facilities are available in the country, the consumption function will move upward.

(viii) Higher Living Standard: If the real income of the people increases in the country and people adopt the use of new products like television, washing machines, refrigerators, care, etc., the consumption function is high.
(ix) The stock of Liquid Assets: If the consumer has greater amounts of liquid assets; there will be more desirable for the households to spend out of disposable income. The consumption function shifts upward and vice versa.
(x) Consumer Indebtedness: In case the consumer is heavily indebted and they pay bigger monthly installments to repay the debt, then the propensity to consume is low or the consumption function shifts downward and vice versa.
(xi) Windfall Gains: If there are unexpected gains due to the stock market boom in the economy, it tends to shift the consumption function upward. They are windfall gains. The unexpected losses in the stock market lead to the downward shifting of the consumption curve.
(xii) Demographic Factors: The consumption function is also influenced by demographic factors like size of family, occupations, place of residence, etc. Persons living in cities, for instance, spend more than those living in rural areas.
(xiii)Attitude Towards Saving: If a community is consumption-oriented, there will be fewer savings in the country. The consumption function shifts upward. In case, people save more and spend less, then the consumption function will shift downward.
(ix) Demonstration Effect: If people are easily influenced by advertisements on radio and television and seeing the pattern of living of the rich neighbors, the level of total consumption will go up.
These are the factor affecting the consumption function stated by Keynes.