Get the answer of: What are the Possible Shapes of the Consumption Function?

Technical attributes or what we call the properties of consumption function imply an understanding of the shape, position and slope of the consumption function.

There are many conceivable shapes that the consumption function could take.

But two shapes are commonly discussed. One is that it is a straight line rising from left upwards to the right. The second shape is that of a curve. The former is called a linear consumption function while the latter is called a curved consumption function.

When we ask the question as to what is the nature of relationship between income and consumption—we, in other words, simply ask about the shape and position of the consumption function. We depict the two possible shapes and positions of the consumption function in the following diagrams. Figure 6.3(a) shows a linear consumption function.

It is a straight line. Y1Y2, Y2Y3, are equal successive increments in income as measured by ∆Y’s. We find that the resulting increments in consumption, ‘∆C’s, are also equal. But they are all less than ‘∆Y’s. In other words, the ratio ∆C/∆Y remains constant whatever the level of income, that is, MPC remains constant in a linear consumption function. A straight line has a constant slope throughout.

While statistical studies of consumption behaviour have tended to support a linear consumption function in macroeconomic theory, a curved consumption function is not ruled out. Figure 6.3 (b) shows a curved consumption function. Let us find out the implications of such a consumption function.

It should be readily clear from the diagram that while ‘∆F’s are equal, ‘∆C’s go on diminishing with successive equal increments in income. It means that with equal increments in income, increments in consumption diminish. ∆C/∆F continues to decrease in a curved consumption function. This means that MPC continues to diminish in a curved consumption function.

The consumption function curve goes on flattening out to the right. Since MPC can never fall to zero or be less than zero, the curve of consumption function can never fall downwards: at the most it can be flat, parallel to the horizontal axis.

In the many field surveys on household behaviour, however, marginal propensity to consume is found to be constant for all income levels. The information obtained is such that it will justify a straight line (linear) consumption function. MPC calculated from statistical data collected in U.S.A. is found to be almost constant, i.e., between 0.6 and 0.8 in most cases. In most of these studies it was the long-period consumption function which was considered.

There are two versions explaining the linear shape of the long-period consumption function:

(1) The life-cycle hypothesis, and