RBSE Class 12 Economics Notes Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function

Rajasthan Board RBSE Class 12 Economics Notes Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function

Classical economists believed that total employment exists in economics.

J. B. Say’s laws of market are also based on the assumption of total employment.

During 1929-33, a huge financial crisis appeared in Great Britain, America and other
countries, which gave rise to unemployment and also resulted in the decrease of national income.

In 1936, J. M. Keynes disproved the concepts of classical economists in his book, “The General Theory of Employment, Interest and Money” and established a new concept of income and employment.

Keynes identified the factors affecting employment in his book and also described the factors that are responsible for unemployment in the economy.

Keynes theory of income and employment is a short term theory.

RBSE Class 12 Economics Notes Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function

In short run, if national income of the country is more, then the employment will also be more.

Consumption function is an important tool of Keynesian Economics. .

According to Keynes, Consumption is majorly affected by the income of consumers.

Consumption increases with the increase in income and vice-versa.

Consumption depends on the disposable income.

Mathematically, consumption function can be expressed as follows :
C = f(yd)
Here, C = consumption,
yd = Disposable Income.
If consumption function is a linear straight line, then :
C = a + byd
Here, a = Autonomous consumption
b = Marginal propensity to consume or slope of consumption function
OR
\(b=\frac { \triangle C }{ { \triangle y }_{ d } } \)

Consumption function tells us, that even when the income is zero, every person consumes something or the other.

Average propensity to consume explains the relationship between total income and total consumption.
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When increase in consumption is divided by the increase in income, than marginal propensity to consume is determined.
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Marginal propensity to consume is less than one and greater than zero.
O < MPC < l

Marginal propensity to consume denotes the slope of consumption function.

Savings are determined by deducting consumption expenditure from the income.
S = Y – C

Mathematical form of saving function is :
a = – a + (l – b) y

Average propensity to save is the ratio between total savings and total income at a given level of output and employment in the economy.
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APS (average propensity to save) is obtained by deducting (average propensity to consume) APC from 1.

When change in savings is divided by the change in income, marginal propensity to save is obtained.
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MPS or Marginal Propensity to save is obtained by deducting marginal propensity to consume (MPC) from 1.

In economics, Investment means acquiring new productive assets and using these for the production of goods and services.

In economy, investments can be of following types . Public investment, Private investment, Autonomous investments, induced Investement, etc.

The savings done by people in a certain year is called prospective (Ex-ante) savings.

Prospective savings are not equal to prospective investment.

Ex-post savings are those savings which a family unit actually saves from its income.

In a capitalist economy, investment is always induced by the objective of profit.

Investment depends on two points :

  1. Marginal efficiency of capital (MEC)
  2. Rates of Interest.

An investor, while taking investment related decision, compares marginal efficiency of capital (MEC) with the interest rate.

Important Terminology

  1. Marginal Propensity to Consume : The ratio between the change in consumption and change in income is termed as marginal propensity to consume.
  2. Average Propensity to Consume : The ratio of collective consumption and collective income is called average propensity to consume.
  3. Saving Fuction : The functional relationship between income and savings is called a saving function.
  4. Average Propensity to Save : It is the ratio between total savings and total income at a given level of output and employment in the economy.

RBSE Class 12 Economics Notes