Fundamental of Economics

The consumption function or propensity to consume refers to income-consumption relationship. It is a functional relationship between two aggregates, i.e., total consumption and gross national income. Symbolically, the relationship is represented as: C = f(Y) Where, C = Consumption Y = Income f = Functional Relationship. Thus the consumption function indicates a functional relationship between C and Y, where C is the dependent and Y is independent variable, i.e., C is determined by Y. In fact, consumption function or propensity to consume is a schedule of the various amounts of consumption expenditure corresponding to different levels of income. Assumption of Consumption Function 1. It is assumed that habit of the people regarding spending does not change or that the propensity to consume remains the same. Normally, the propensity to consume does remain the same; it is more or less stable. This means that we assume that only income changes, whereas the o