Understanding Keynesian Consumption and Savings Functions in Macroeconomics
Keynesian consumption function details the relationship between total consumption and gross national income. It emphasizes the stability of aggregate consumption and the marginal propensity to consume. Similarly, Keynesian savings function illustrates the link between savings and national income, highlighting that saving is a function of income and the rate of increase in saving is less than that of income. Both functions play crucial roles in macroeconomic analysis and policy formulation.
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COURSE: B.Sc. (PROGRAMME) IN ECONOMICS PAPER NAME MACROECONOMICS-I TOPIC-KEYNESIAN CONSUMPTION FUNCTION AND SAVINGS FUNCTION YEAR- FIRST SEMESTER- 2 SESSION- 2020-2021 DATE OF LECTURE : 15/06/2021 PREPARED BY DR. KAMALIKA CHAKRABORTY ASSISTANT PROFESSOR (DEPARTMENT OF ECONOMICS) KHATRA ADIBASI MAHAVIDYALAYA, BANKURA,WEST BENGAL
Definition of Keynesian Consumption Function: Keynesian consumption function, is an economic formula that shows the functional relationship between total consumption and gross national income. Characteristics of Keynesian Consumption Function: (1) Aggregate real consumption expenditure is a stable function of real income. (2) The marginal propensity to consume (MPC) or the slope of the consumption function defined as dc/dY must lie between zero and one i.e. 0 < MPC < 1. (3) The average propensity to consume (APC) or the proportion of income spent on consumption defined as C/Y decreases as income increases. When the average propensity to consume (APC) falls, the marginal propensity to consume (MPC) must be lower than the APC.
Characteristics of Keynesian Consumption Function (contd.): (4) The marginal propensity to consume (MPC) itself probably decreases or remains constant as income increases. The consumption function formula is C=a+bY where: C is the total consumption. a is the basic consumption. b is MPC. Y is income.
Definition of Keynesian Savings Function: Keynesian savings function, is an economic formula that shows the functional relationship between total savings and gross national income. Characteristics of Keynesian Savings Function: 1. Saving is a stable function of income. 2 .Saving varies directly with income. 3. The rate of increase in saving is less than the rate of increase in income.
Keynesian Savings Function S = Y C = Y (a + bY) [... C = a + bY] or S = a + (1 b)Y [0< (l-b) < l] Savings function has a negative intercept indicated by a and positive intercept denoted by 1-b. (1-b) is called the Marginal Propensity to Save or MPS. MPS is the change in savings due to change in income. MPS = S / Y The value of MPS is always less than one. APS is the proportion of income devoted to savings. It is obtained by dividing total saving by total income, i.e.,
