Consumption Function was first propounded by economist John Keynes and he gave a brilliant idea behind income which became Consumption Function. There is always a desire to buy something or the other. But to buy any goods or services there should proper support of income. Everything that is wished cannot be bought. That is the difference between Real and Virtual.
Consumption of any product is based on the income of the individual and there is always some kind of necessity to buy products. Keynes was of the opinion that there is a strong relation between Real Disposable Income and Consumer spending. A person may be willing to buy many products and services but his income is not so much to avail those facilities. This is what Consumption Function entails. Consumption functions are of two types:
1. Autonomous Consumption
2. Marginal Propensity to consume
Autonomous consumption: There are certain types of consumption which has to be done. It is a compulsory spending. Even if the income is zero autonomous consumption still persist. Keynes was of the opinion that autonomous consumption has no relation to demand or price. No matter how much the price of a product increase autonomous consumption is done by a household or in macroeconomics by an economy.
Formula for Consumption Function
CF = AC + MC + I
CF is Consumption Function
AC is Autonomous Consumption
MC is Marginal Propensity to consume and
I is Real Disposable Income
As mentioned earlier Autonomous Consumption is normally taken positively as it is not affected by the economic conditions. However, MPC is said to be positive as the propensity to consume increased with a rise in income level. Thus the Consumption Function is governed by ample of factors.
However, Keynes had to face much opposition from the critics who felt the Consumption factor of no use.
Critical Evaluation of Consumption Function
- Keynes mentioned Income and disposable income but he did not take future income into consideration
- Prices are always subjected to changes
- Keynes should have also taken changes in buying pattern of the individuals
- Tastes and preferences should have been taken
These criticisms gave a gateway to many new economists which then developed new economic formulas to calculate the buying and the consumption function of the household and the economy as a whole. But it can be said that John Keynes should be on the pedestal as he laid the foundation of Consumption Function.