Determinants of consumption function, Managerial Economics

Assignment Help:

Other Determinants

1.          Rate of Interest

Is contained in the argument of the classified economists who argued that rational consumers will save more and consume less if the rate of interest is high.

2.         Relative Prices

Influences the aggregate consumption.  If relative prices are high, the level of consumption will be low

3.         Capital Gains

Keynes observed that there is a possibility of windfall gains or losses influencing consumption.  He says consumption of the wealth owning group may be extremely susceptible to unforeseen changes in the money value of their wealth.  This is true of the stock minded speculative economy.

4.         Wealth

The possession of liquid assets influences the amount that you have to save.  It stems from the Diminishing Marginal Utility of Wealth.  The larger the stock of wealth, the lower its Marginal Utility and consequently the weaker the desire to add to future wealth by curtailing present consumption.

In this case, the more wealth an individual has, the weaker will be the desire to accumulate still more savings at that particular time.

5.         Money Stock or Liquid Assets:

Possession of liquid assets boosts consumption in that they can be changed into cash and thus consumed.

6.         Availability of Consumer Credit:

Normally influences spending of the consumer of durables.

7.         Attitudes and Expectations of the Consumer

A change in the consumer attitudes will affect consumer behaviour.  The expectations attained by the consumer about income increases will affect the consumer behaviour.  If in the face of price increases they expect further price increases; they shall increase their purchases further.  N.B. These things might be true of an individual, but not the [aggregate] society.

8.         The money Illusion

Some people look at money at the face value.  Consumption will be affected if customers are subject to money illusion.  The phenomenon of Money illusion occurs when despite proportional changes in the prices of goods and services and then their money incomes which keeps real incomes unchanged, consumers make a change in their real consumption pattern.  It is know as Pigou Effect which talks of real balance.  With a change in nominal income, people behave in the same way as though their real income has gone up.

Suppose price and Money Income increases by 10%, for the families which regard their real income unchanged and do not suffer from money illusion they would take their real incomes as unchanged and would only increase their consumption by 10%.

9.         Distribution of Income

If the Marginal Propensity to consume among the poor is high, then redistribution of wealth from the rich to the poor leads to higher consumption.

10.        Composition of the Population:

In sex and age.


Related Discussions:- Determinants of consumption function

Ramsey pricing, Describe ramsey pricing with detailed examples

Describe ramsey pricing with detailed examples

Show the fixed proportion production function, Q. Show the Fixed Proportion...

Q. Show the Fixed Proportion Production Function? A fixed proportion production function is one in that technology needs a fixed combination of inputs, say labour and capital,

State the characteristics of managerial economics, CHARACTERISTICS OF MANAG...

CHARACTERISTICS OF MANAGERIAL ECONOMICS 1. Uses theory of firm: Managerial economics uses economic principles and conceptsthat are known as theory of Firm or 'Economics of the

Production and cost analysis , What is the formula of finding Fixed cost of...

What is the formula of finding Fixed cost of a quadratic function

the occupancy rate of the hospital, In 2006, a hospital with 130 beds had ...

In 2006, a hospital with 130 beds had 8,795 admissions. The average length of stay?for every patient was 4.7 days. Assuming full capacity is 100 percent, detremine the occupancy ra

Nature of demand curves and elasticity, Usually, elasticity of a demand cur...

Usually, elasticity of a demand curve throughout its length isn't the same (Fig. below). It varies between 0 and ∞, or in other words, 0 ≤ e p ≥ ∞ In some cases, though, the

What is monopoly, Q. What is Monopoly? The term 'Monopoly' has been der...

Q. What is Monopoly? The term 'Monopoly' has been derivative of Greek term 'Monopolies' that means a single seller. So, monopoly is a market condition in that there is a single

Expected price per product, Airbus Boeing Deman...

Airbus Boeing Demand P = 182.868 - 0.0003Q P = 198.6592 - 0.00013Q TVC Curve TVC = 104.8822Q - 0.001Q^2 + 0

Demand-pull inflation, Demand-pull inflation is when aggregate demand exce...

Demand-pull inflation is when aggregate demand exceeds the value of output (measured in constant prices) at full employment.  The excess demand of goods and services cannot be met

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd