Macro EconomicsChapter 3
Chapter 3
Consumption and Investment
Consumption (C) and investment (I)
Since we are more concerned with two sector model in our course, we will discuss about consumption and investment.
In a two sector model, a simple but an imaginary assumption of no government and no foreign trade is made.
Here Yd =C+S or Yd =AD (aggregate demand) This also implies that C+S=C+I
Consumption
Introducing you with: (Think yourself in advance)
What is consumption?
What is consumption function?
What are the determinants of consumption?
What is MPC?
What is APC?
Consumption
“Consumption is the sole end and purpose of all production.” Adam Smith
Consumption is the act of spending income for buying goods and services to satisfy wants.
Determinants of consumption are disposable income (after tax income) of the consumers, their accumulated wealth or assets, their expected future income, the actual price level, the expected general price level, rate of interest, thriftiness, their age, sex and family size etc.
Consumption function
A relation between consumption and its various determinants is called the consumption function.
The consumption function taking all these determinants into account can be written as:
C=f (Yd, W, Ye, P, Pe, r, s, DF…..)
Keynesian Consumption function Keynes, however, asserts that income alone is the most important determinant of consumption. Here, income refers to the disposable income.
The
Keynesian consumption function, thus, can be written as:
C=f (Y ), 1>f>0 d Where,
C=Consumption demand
Yd = Disposable income= (Y-T)
Y=Personal income
T=Taxes (related to income)
Keynesian Consumption function
The assumption of the Keynesian consumption function is that consumption depends on income, other things being equal. The higher the income, higher is the consumption, ceteris paribus. Keynes’ psychological law of consumption (The concept of the marginal propensity to consume).
Keynes argue that when the income
Consumption and Investment
Consumption (C) and investment (I)
Since we are more concerned with two sector model in our course, we will discuss about consumption and investment.
In a two sector model, a simple but an imaginary assumption of no government and no foreign trade is made.
Here Yd =C+S or Yd =AD (aggregate demand) This also implies that C+S=C+I
Consumption
Introducing you with: (Think yourself in advance)
What is consumption?
What is consumption function?
What are the determinants of consumption?
What is MPC?
What is APC?
Consumption
“Consumption is the sole end and purpose of all production.” Adam Smith
Consumption is the act of spending income for buying goods and services to satisfy wants.
Determinants of consumption are disposable income (after tax income) of the consumers, their accumulated wealth or assets, their expected future income, the actual price level, the expected general price level, rate of interest, thriftiness, their age, sex and family size etc.
Consumption function
A relation between consumption and its various determinants is called the consumption function.
The consumption function taking all these determinants into account can be written as:
C=f (Yd, W, Ye, P, Pe, r, s, DF…..)
Keynesian Consumption function Keynes, however, asserts that income alone is the most important determinant of consumption. Here, income refers to the disposable income.
The
Keynesian consumption function, thus, can be written as:
C=f (Y ), 1>f>0 d Where,
C=Consumption demand
Yd = Disposable income= (Y-T)
Y=Personal income
T=Taxes (related to income)
Keynesian Consumption function
The assumption of the Keynesian consumption function is that consumption depends on income, other things being equal. The higher the income, higher is the consumption, ceteris paribus. Keynes’ psychological law of consumption (The concept of the marginal propensity to consume).
Keynes argue that when the income