A Study of Short-run Consumption Function and its Modification with Some Special Assumptions

IOSR Journal of Economics and Finance (IOSR-JEF)
e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 6, Issue 3. Ver. I (May.-Jun. 2015), PP 15-25
www.iosrjournals.org
DOI: 10.9790/5933-06311525 www.iosrjournals.org 15 | Page
A Study of Short-run Consumption Function and its Modification
with Some Special Assumptions
Md. Rostam Ali1
, Md. Mostafizur Rahman2
1
(Department of Business Administration, Mawlana Bhashani Science and Technology University, Bangladesh)
2
(Department of Management, Hajee Mohammad Danesh Science and Technology University, Bangladesh)
Abstract : Consumption function shows the relationship between a nation’s income and consumption and it is
imperative in macroeconomics. The present study is causal in nature. The study is based on secondary data
sources especially absolute income theory of consumption under the Keynes’s short-run consumption function
and psychological law of consumption. This paper is an endeavor to study the Keynes’s short-run consumption
function (SCFk) with some special assumptions that SCFk is misleading to formulate the macroeconomic
policies. This study has developed a modified short-run consumption function (SCFm) with some special
assumptions. The SCFm shows that total consumption is lower than the total consumption by SCFk. So, the
saving derived from SCFm is higher than the saving derived from SCFk. This study constructs that under some
special assumption, SCFm helps to calculate the exact amount of consumption, saving, investment to formulate
macroeconomic policy (policies) properly which has great impact in macroeconomics.
Keywords: Autonomous Consumption, Consumption, Consumption Function, Income, Saving, Short-run
I. Introduction
Consumption is an act of human beings by which they finish the utility of goods and services to satisfy
their wants. On the other hand consumption function shows the relationship between a nation‟s aggregate
income and consumption. Basically consumption depends on income and propensity to consume. Propensity to
consume means a nation‟s tendency to consume form its income. In short- run the factors (price level, interest
rate, willingness to save) affecting propensity consume remain constant. So, in short- run consumption depends
on income. Again, Keynes (1936) argues that the amount of aggregate consumption depends mainly on the
amount of aggregate income. That‟s why, consumption increases or decreases as income increases or decreases.
So, consumption is a function of income in short-run. Thus,
C = f(Y)
Since Keynes was concerned with the short-run consumption function. The Keynesian consumption
function is written as:
C= a + bY
Where C is consumption, a is interception term (autonomous consumption), b is slope of consumption
function (marginal propensity to consume) and Y is disposable income. Short-run consumption is classified into
two types. One is autonomous consumption (a) which is independent from income or the level of consumption if
income (Y) is zero.
Another one is induced consumption (bY) directly depends on income. Consumption function is
important both in theoretically and practically to formulate the macroeconomic policies (investment, saving,
unemployment, policies to control the economic fluctuation). Therefore Prof. A. H. Hansen has remarked that
consumption function is epoch making contribution of Keynes to economic theory. The definition of Say‟s Law
of market „supply creates its own demand‟ occurs in General Theory of Employment, Interest and Money
(Keynes 1936). Therefore overproduction and unemployment in the economy is not possible. But according to
the Keynesian consumption function, when income increases, consumption increases less than the increase in
income. So, a gap between income and consumption is created and this is called saving. This gap implies that all
output produced may not be sold and deficiency of demand may be occurred. Actually every supply or
production creates income equal to the output produced. But all income is not consumed and there is no
guarantee that investment is equal to the saving. At full-employment level of income, if investment is less than
saving gap then deficiency of effective demand is occurred. As a result overproduction and unemployment
arises in a capitalist economy. Thus say‟s law is proved invalid by the study of the consumption function.
To determine the certain level of income and employment, the concept of propensity to consume is
very important. Gap between income and consumption must be fulfilled by the investment expenditure to
maintain a certain level of income and employment; otherwise it is not possible to maintain that level of income
and employment due to the deficiency of the effective demand. As short-run consumption function is stable, the
economic fluctuation is occurred due to the fluctuation of investment demand in capitalist economy.

A Study of Short-run Consumption Function and its Modification with Some Special Assumptions
The theory of multiplier has great importance to formulate the macroeconomic policies and Keynes‟s
investment or income multiplier is derived from the concept of propensity to consume. Actually the magnitude
of this multiplier is equal to the reciprocal of one minus marginal propensity to consume (MPC). Thus,
K =
Where K is multiplier, MPC is marginal propensity to consume and MPS is marginal propensity to
save. Under this concept of multiplier, if investment increases, income, output and employment increase by the
multiple amounts, according to the size of multiplier. But, Stonier and Hague (1972) assert that when MPC is
equal to one i.e. the whole of the increment in income is consumed and nothing is saved. In this case, the size of
multiplier will be equal to infinity. The level of investment is greatly affected by the marginal efficiency of
capital (MEC) in short-run. But MEC is nothing but the expected rate of profit on investment in future which
depends on the future consumption demand. When income increases, consumption does not increase
proportionately. So, aggregate demand becomes deficient and MEC decline due to the nature of consumption
function. Business cycle is also explained by the consumption function. As MPC is less than one and average
propensity to consume (APC) declines with increasing the income. So consumption demand does not increase as
much as the increase in income and output. Due to the deficiency of aggregate demand, investment adversely
affected. As a result economic growth swings down from the peak. Besides, Duesenberry‟s (1949) ratchet effect
hypothesis asserts that when income of a nation falls, their consumption expenditure does not fall much. This is
because, the people try to maintain their consumption at the highest level attained earlier. This effect ultimately
induces investment for replacement of capital goods wear out over a period of business cycle. Again with the
working of Keynesian investment multiplier recovery from recession is occurred. Though according to the life
cycle theory (Ando, A., Modigliani, Franco, 1963), the consumption in any period is not the function of current
income of that period but of the whole lifetime expected income. Again, Milton Friedman‟s (1957) permanent
income hypothesis asserts that consumption is determined by long-term expected income rather than current
level of income. But consumption function has great importance to formulate the macroeconomic policies. Due
to some special assumptions which may be exist in a country; a certain model of consumption function may be
misleading to use to formulate the macroeconomic policies. So in this study, it has been tried to modify the short
consumption function with some special assumptions which may exist in a country.
II. Objective of the study
The main objectives of this study are to study the SCFk and justify it with some special assumptions
and to develop SCFm by considering some special assumptions.
III. Methodology of the study
The study is causal in nature. The study is based on secondary data sources especially absolute income
theory of consumption (1936) in the book named general theory of employment, interest and money. Under this
theory the Keynes‟s short-run consumption function i.e. C = a + b and psychological law of consumption have
been used for this study. The study has been developed to critically contrast the Keynes‟s short-run consumption
function with modified short-run consumption function under some specific assumptions.
IV. Discussion and analysis
4.1 Study of Short-run Consumption Function: Consumption function plays very important role in
macroeconomics. The following Keynes‟s consumption is short- run consumption function (SCFk).
C = a + bY .................................. ………………………….. (1)
Here, C = Consumption expenditure, a = Autonomous consumption (Intercept term)
b = Marginal propensity to consume (MPC) and Y = Disposable income
The table -1 is made for various level of income from the SCFk. Where, a = 200 and b =.75

Table -1: Consumption at various level of income
The SCFk is represented by the following graph in Figure 1.
Figure.1: Keynes‟s short-run consumption function (SCFk).
In the Fig. 1 X-axis represents the disposable income and Y-axis represents the consumption
expenditure. Here CCʹ curve is consumption function curve. In this figure a line OZ is made 450
angle with the
X-axis or Y-axis. So, every point on this OZ line is equidistant from the both X-axis and Y-axis. If the
consumption function curve coincides with the OZ line, it indicates that the amount of consumption is equal to
the income (Y = C) at any level of income. In this case consumption is increased by the same amount as income
increases. But Keynes‟s (1936) Psychological law of consumption illustrates that the fundamental psychological
law, upon which we are entitled to depend with great confidence both a priori from our knowledge of human
nature and from (the detailed facts of experience is that men and women, too) are disposed, as a rule and on an
average to increase their consumption as their income increases, but not by as much as the increase in their
income.
So, according to the Psychological law of consumption that as income increases, consumption
increases but not as much as the increase in income. That‟s why, in this figure the consumption function curve
CCʹ deviates from the OZ line. At lower level of income consumption function curve CCʹ lies above the OZ
line. At this lower level of income, consumption is higher than the income. In this case a nation may use its
previous saving or borrow the money to maintain its consumption expenditure. As income increases,
consumption also increases but at income level OY1, consumption is equal to income and saving at this point is
zero. After that consumption increases as income increases but less than the increase in income. As a result
consumption function curves CCʹ lies below the OZ line beyond OY1. Beyond the level of income OY1, the gap
between income and consumption is widening. This gap represents savings. As income increases saving gap
also widens and this has a significant implication in macroeconomics.
Disposable income
(Y)
Consumption
expenditure (C)
Average propensity to
consume (APC)
Marginal propensity to
consume (MPC)
Saving
(S)
0 200 - - -200
100 275 2.75 .75 -175
200 350 1.75 .75 -150
300 425 1.417 .75 -125
400 500 1.25 .75 -100
500 575 1.15 .75 -75
600 650 1.083 .75 -50
700 725 1.036 .75 -25
800 800 1.00 .75 0
900 875 .972 .75 25
1000 950 .95 .75 50

4.2 Characteristics of the SCFk:
4.2.1 Short-run consumption is determined by the level of income. An increase or decrease in consumption is
causes by an increase or decrease in income. There are many subjective factors (willingness to save) and
objective factors (price level, interest rate, and income distribution) which can influence the consumption but
these factors do not change in short–run. Therefore, consumption functions remain stable in short–run.
4.2.2 The SCFk is C = a + bY. The equation has two parts, a and bY. Here, a means autonomous consumption,
which is independent from income. This is the minimum level of consumption that a nation has to consume even
its income is zero. Such as food, rent, electricity because these expenditures are unavoidable whether one has
money or not. If one‟s income is zero, still he/she has to eat and need a place to live; in this case one may use
the previous saving or borrow money to pay for these expenses which is known as autonomous consumption.
bY means induced consumption which depends on income. Increase or decrease in income causes an increase or
decrease in induced consumption.
So, total consumption = Autonomous consumption + Induced consumption.
4.2.3 The main characteristic of SCFk is that, it is linear. So if it is explained by graph, we will get a straight
line.
4.2.4 Another important thing of SCFk is marginal propensity to consumption (MPC). According to Keynes‟
psychological low of consumption:
0  MPC  1
Consumption increases as income increases but not as much as increase in income.
4.2.5 Average propensity to consumption (APC) =
From (i) we get
C = a + bY
So, APC =
So, APC decreases as income increases.
Again, APC = and b = MPC
So, APC > MPC.
4.2.6 It is known, that
MPC =
Again,
So, MPC (b) remains constant even income increases.
4.2.7 The elasticity of SCFk (Ek) is less than one. For SCFk, consumption is inelastic with respect to income. The
elasticity of SCFk is-
Ek =
=
=
=
But, bY ˂ (a + bY)
So, Ek ˂ 1
4.3 Deriving Saving Function From SCFk Denoted by SFk: As disposable income is either consumed or
saved. So, saving is a part of income which is not consumed. Thus,
Y = C + S . . . . . . . . . . . . . . . . . . . ……………….……..… (2)
Here, Y = Disposable income, C = Consumption expenditure and S = Saving
Thus, the following equation is derived from (2):
S = Y – C. . . . . . . . . . . . . . . . . . . . ……………………….. (3)
By substituting equation (1) in (2) we have-
S = Y – (a + bY)
= Y – a – bY
= - a + (1- b)Y . . . . . . . . . . . . . . . ……………………… . (4)
Equation (4) represents the saving function derived from SCFk. Here, b is marginal propensity to consume
(MPC) and (1- b) is marginal propensity to save (MPS).

If a = 200 and b = .75 then by substituting these value in (4) we get-
S = - 200 + (1 - .75)Y
= - 200 + .25Y
Here .25 is marginal propensity to save. Marginal propensity to consume (MPC) plus marginal propensity to
save is one. Thus, MPC + MPS = 1.
Figure 2. represents SFk derived from SCFk
Fig.2. Saving function (SFk) derived from SCFk
In the Fig. 2 In the upper panel X-axis represents the disposable income and Y-axis represents the
consumption expenditure. In the bottom panel X-axis represents the disposable income and Y-axis represents
the saving. Saving curve SSʹ is drawn in the panel at the bottom. The gap between CCʹ curve and OZ curve in
the upper panel is shown by SSʹ curve. Consumption exceeds income upto the income level OY1, that is, there is
dissaving up to the income level OY1. At income level OY1, consumption is equal to income, that is, saving is
zero. There is positive saving beyond the income level OY1. In the upper panel average propensity to consume
(APC) falls as income increases, that is, average propensity to save (APS) increases as income increases. So, in
Fig. 2 not only absolute amount of saving increases but also average propensity to save (APS) increases as
income increases.
4.4 Modified Short-run Consumption Function with Some Special Assumptions: The study has derived a
modified short-run consumption function (SCFm) with some special assumptions. These assumptions are:
1.4.1 The economic condition remain normal (there are no hyperinflation, war and other abnormal
conditions)
1.4.2 Autonomous consumption is financed by borrowing.
1.4.3 When income (Y) starts to increase from zero, then at first the income is used to repay the borrowing
for autonomous consumption after that the additional income (Y – a) is used for induced consumption.
1.4.4 Keynes Psychological law of consumption (0  MPC  1) is applicable when Y > a.
1.4.5 Income (Y) is greater than autonomous consumption. So, Y > a.
From the above assumptions the study has derived the following modified short-run consumption function
(SCFm).
C = a + b (Y – a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)
Here, C = Consumption expenditure, a = Autonomous consumption ( intercept term)
b = Marginal propensity to consumption (MPC), and Y = Disposable income.

The table-2 is made for various level of income from the SCFm. Where, a = 200, and b = .75
Table-2: Consumption at various level of income
Disposable
income (Y)
Consumption
expenditure (C)
Average propensity
consumption (APC)
Marginal propensity
to consume (MPC)
Saving (S)
0 200 (Borrowing) - - -200
100
(Repaying)
200 2.000 0 -100
200
(Repaying)
200 1.000 0 0
300 275 0.917 .75 25
400 350 0.875 .75 50
500 425 0.850 .75 75
600 500 0.833 .75 100
700 575 0.821 .75 125
800 650 0.813 .75 150
900 725 0.806 .75 175
1000 800 0.800 .75 200
This SCFm is represented by the following graph in Figure 3.
Figure.3: Modified short-run consumption function (SCFm).
expenditure. Here CC1C2 curve is SCFm curve and OY0 = a. In this figure a line OZ is made 450
angle with the
X-axis or Y-axis. So, every point on this OZ line is equidistant from the both X-axis and Y-axis. If the
consumption function curve coincides with the OZ line, it indicates that the consumption is equal to the income
(Y = C) at any level of income. In this case consumption is increased by the same amount as income increases.
According to the assumption (3), b = 0 when Y ≤ a. And according to the assumption (4), Keynes Psychological
law of consumption (0  MPC  1) is applicable when Y ˃ a. So, in this figure SCFm curve CC1C2 deviates from
the OZ line. Up to the income level OY0, SCFm curve CC1C2 lies above the OZ line. It indicates consumption is
higher than the income up to the income level OY0. In this case a nation‟s borrowing is used to maintain its
consumption expenses. At income level OY0, consumption is equal to income and saving at this point is zero.
After that consumption increases as income increases but less than the increase in income. As a result C1C2 line
part of the SCFm curve CC1C2 lies below the OZ line beyond OY0. Beyond the level of income OY0, the gap
between income and consumption is widening. This gap represents saving. After the level of income OY0 as
income increases saving gap also widens and this has a significant implication in macroeconomics.
4.5 Characteristics of the SCFm:
4.5.1 According to SCFm, consumption is determined by the level of income. An increase or decrease in
consumption is causes by an increase or decrease in income. There are many subjective factors (willingness to
save) and objective factors (price level, interest rate, and income distribution) which can influence the
consumption but these factors do not change in short-run. Therefore, SCFm remain stable in short-run.
4.5.2 Total consumption equal to autonomous consumption plus induced consumption. The SCFm is C = a +
b(Y – a). It has two parts, a and b(Y – a). Here, a means autonomous consumption, which is independent from
income. This is the minimum level of consumption that a nation has to consume even its income is zero. Such as

food, rent, electricity because these expenditures can‟t be avoided whether one has money or not. If one‟s
income is zero, still he/she has to eat and need a place to live. In this case one borrows money to pay for these
expenses which is known as autonomous consumption. b(Y - a) means induced consumption which depends on
income after satisfying the autonomous consumption.
4.5.3 As income is used to repay the borrowing for autonomous consumption first, consumption does not
increase up to the level of income to autonomous consumption (Y ≤ a). If income increases beyond the level of
autonomous consumption then consumption increases as income increases but not as much as increase in
income. So,
b (MPC) = 0, (when Y ≤ a)
But 0 ˂ b ˂1 (when Y ˃ a)
4.5.4 Average propensity to consumption (APC) =
From Equation (5) we get
C = a + b(Y – a)
So, APC =
Again, must be greater than means ˃
So, APC > MPC
4.5.5 From Equation (5) we get
C = a + b(Y – a) = a + bY - ab
MPC =
Again,
So, MPC (b) remains constant even income increases.
4.5.6 The elasticity of SCFm (Em) is zero (perfectly inelastic) upto the income level equal to autonomous
consumption (Y ≤ a) but the elasticity of SCFm (Em) is less than one (inelastic) beyond the income level equal to
autonomous consumption (Y ˃ a). The elasticity of SCFm is-
Em =
=
=
=
According to the assumption (1.4.3), b = 0 when Y ≤ a. In this case, Em = = 0.
According to the assumption (1.4.4), 0 ˂ b ˂ 1 when Y ˃ a. In this case,
Em =
Here, a ˃ ab
Again, bY ˂ (a + bY – ab). So, Ek ˂ 1.
4.6 Deriving Saving Function From SCFm Denoted by SFm: As disposable income is either consumed or
saved. So, saving is a part of income which is not consumed. From Equation (2) we get
Y = C + S
Here, Y = Disposable income, C = Consumption expenditure and S = Saving
From Equation (3) we get S = Y – C
By substituting Equation (5) for value C in the above equation we get-
S = Y – {a + b(Y – a)}
= Y – a – b(Y – a)
= Y – a – bY + ab
= Y– bY– a + ab
= Y(1 – b) – a(1 – b)
= (1- b) (Y – a) . . . . . . . . . . . . . . . (6)
As b = 0, (when, Y ≤ a)

So, S = – a + Y. . . . . . . . . . . . . . . . . . .(7) (when, Y ≤ a)
So, – a is the intercept term of the modified saving function (SFm) which is same as Keynes‟s saving
function (SFk). The above equation (6) and (7) represents the saving function (SFm) derived from SCFm which is
represented in the figure.4.
Figure.4: Modified saving function (SFm) derived from SCFm
In the Fig. 4 in the upper panel X-axis represents the disposable income and Y-axis represents the
the saving. In the both panel income level OY0 equal to autonomous consumption (a). Saving curve SY0S2 is
drawn in the panel at the bottom. The gap between SCFm curve CC1C2 and income curve OZ in the upper panel
is shown by SY0S2 curve. Consumption exceeds income up to the income level OY0, that is, there is dissaving
upto the income level OY0. At income level OY0, consumption is equal to income, that is, saving is zero. There
is positive saving beyond the income level OY0. In the upper panel average propensity to consume (APC) falls
as income increases, that is, average propensity to save (APS) increases as income increases. So, in Fig.4: not
only absolute amount of saving increases but also increase average propensity to save (APS) as income
increases.
4.7 Comparative analysis of SCFk and SCFm: From equation (1) we get SCFk, that is:-
C = a + bY
From equation (5) we get SCFm, that is:-
C = a + b(Y – a)
If we denote consumption for SCFk by Ck and consumption for SCFm by Cm then-
Ck = a + bY
Cm = a + b(Y – a)
Here, Ck = Consumption expenditure for SCFk
Cm = Consumption expenditure for SCFm
a = Autonomous consumption
b = Marginal propensity to consumption (MPC)
Y = Disposable income.
If a = 200, b = .75 then consumption for both SCFk and SCFm at various level of income is shown in table-3.

Table-3: Consumption for both SCFk and SCFm at various level of income
Disposable
income (Y)
Keynes‟s
Consumption
expenditure
(Ck)
Modified
Consumption
expenditure
(Cm)
Keynes‟s
Average
propensity
to consume
(APCk)
Modified
Average
propensity
to consume
(APCm)
Keynes‟s
Marginal
propensity
to consume
(MPCk)
Modified
Marginal
propensity
to consume
(MPCm)
Keynes's
Saving
(Sk)
Modified
Saving
(Sm)
0 200 200 -- -- -- -- -200 -200
100 275 200 2.75 2.000 .75 0 -175 -100
200 350 200 1.75 1.000 .75 0 -150 0
300 425 275 1.417 0.917 .75 .75 -125 25
400 500 350 1.25 0.875 .75 .75 -100 50
500 575 425 1.15 0.850 .75 .75 -75 75
600 650 500 1.083 0.833 .75 .75 -50 100
700 725 575 1.036 0.821 .75 .75 -25 125
800 800 650 1.00 0.813 .75 .75 0 150
900 875 725 .972 0.806 .75 .75 25 175
1000 950 800 .95 0.800 .75 .75 50 200
Both SCFk and SCFm are represented in the following Figure 5.
Figure.5: SCFk and SCFm
expenditure. Here CCʹ curve is SCFk curve and CC1C2 curve is SCFm and CC1C2 lies below the CCʹ. In this
figure a line OZ is made 450
angle with the X-axis or Y-axis. So, every point on this OZ line is equidistant from
the both X-axis and Y-axis. If the consumption function curve coincides with the OZ line, it indicates that the
amount of consumption is equal to the income (Y = C) at any level of income. In this case consumption is
increased by the same amount as income increases. According to the assumption (1.4.3), b = 0 when Y ≤ a and
according to the Keynes Psychological law of consumption (0  MPC  1) “as income increases, consumption
increases but not as much as the increase in income.” So, in this figure the consumption function curves deviate
from the OZ line. Upto the income level OY0, SCFm curve CC1C2 and upto the income level OY1, SCFk curve
CCʹ lie above the OZ line. Upto the income level OY0 modified consumption is higher than the income and upto
the income level OY1 Keynes‟s consumption is higher than the income. At income level OY0 modified saving
(Sm) is zero and at income level OY1 Keynes‟s saving (Sk) is zero. After the income level OY0 and OY1
modified consumption and Keynes‟s consumption increases respectively as income increases but less than the
increase in income. As a result SCFm curve CC1C2 and SCFk curve CCʹ lie below the OZ line beyond the income
level OY0 and OY1 respectively. Beyond the level of income OY0, the gap between income and modified
consumption and beyond the level of income OY1, the gap between income and Keynes consumption are
widening. These gaps represent savings.
4.8 Comparative analysis between saving function derived from SCFk (Sk) and saving function derived
from SCFm (Sm): SFk is derived in equation (4) and SFm is derived in equation (6). So,

S = – a + (1 – b) Y [Saving Function derived from SCFk]
S = (1 – b) (Y – a) [Saving Function derived from SCFm]
If we denote saving for SCFk by Sk and saving for SCFm by Sm then:
Sk = – a + (1 – b)Y
Sm = (1 – b) (Y – a)
Both the saving functions SFk and SFm derived from the both consumption functions SCFk and SCFm
respectively are represented in the following Figure 6.
Figure 6: SFk and SFm derived from SCFk and SCFm respectively
In the Fig. 6 in the upper panel X-axis represents the disposable income and Y-axis represents the
the saving. In the upper panel CC1C2 is SCFm curve and CCʹ is SCFk curve. In the bottom panel SY0S2 is SFm
curve derived from SCFm curve CC1C2 and SSʹ is SFk curve derived from SCFk curve CCʹ. In the upper panel
CCʹ curve is on the above of CC1C2 curve. It indicates that consumption of SCFk is higher than the consumption
of SCFm at any level of income. In the bottom panel SY0S2 curve is on the above of SSʹ curve. It indicates that
saving of SFm is higher than the saving of SFk at any level of income. Break even income (BEI) is the level of
income where total income is equal to total consumption (Y = C) and saving is equal to zero. Here, BEI for
SCFm is OY0 which is equal to autonomous consumption (a) and BEI for SCFk is OY1. Saving is negative
(dissaving) as consumption exceeds the income upto the break even income level. Saving is positive after the
break even income level. For the SFm the amount of dissaving is OY0S and for the SFk the amount of dissaving
is OY1S. Here the dissaving of SFk is higher than the dissaving of SFm by SY0Y1.
4.9 Key differences between SCFk and SCFm: The study has found the following key differences between
SCFk and SCFm.
4.9.1 Though the autonomous consumption for both consumption functions is same but the induced
consumption is not same. Induced consumption of SCFk (ICk) is higher than the induced consumption of SCFm
(ICm). So, ICk ˃ ICm. As a result total consumption of SCFk is higher than the total consumption of SCFm. So,
CCʹ curve is on the above of CC1C2 curve.
4.9.2 MPC for SCFk (bk) is constant for any level of income but MPC for SCFm (bm) is zero upto the income
level equal to autonomous consumption and after that bm is same as bk. So,
bm = 0 [When, Y ≤ a ]
but bm = bk [When, Y ˃ a ]
4.9.3 APC for SCFk (APCk) =
and APC for SCFm (APCm) =
So, APCk ˃ APCm

4.9.4 According the SCFk a nation borrow or use previous saving even its income is higher than the
autonomous consumption (Y ˃ a). But according the SCFm a nation does not borrow or use previous saving
when its income is higher than the autonomous consumption (Y ˃ a). So,
Saving for SCFm (Sm) ˃ Saving for SCFk (Sk)
4.9.5 Break even income (BEI) is the amount of income which is equal to the consumption (Y = C) and
saving is zero. BEI for SCFm (BEIm) is equal to autonomous consumption and BEI for SCFk (BEIk) is higher
than autonomous consumption. So,
BEIm = a
And BEIk ˃ a
So, BEIk ˃ BEIm
V. Conclusion
Consumption function shows the relationship between a nation‟s income and consumption which is
very significant and has great impact in macroeconomics. This study has modified SCFk with some special
assumptions and developed a new short-run consumption function named modified short-run consumption
(SCFm). According to SCFm consumption does not increase and MPC is zero up to the level of income to
autonomous consumption (Y ≤ a) and consumption increases as income increases beyond the level of income of
autonomous consumption (Y ˃ a). But according to SCFk consumption starts to increases as income increases.
Again, APC for SCFk is higher than the APC for SCFm. The SCFm shows that the total consumption is lower
than the total consumption by SCFk. As a result saving derived from SCFm is higher than the saving derived
from SCFk. So, if the above mention assumptions exist in a country then SCFk is misleading to make economic
plan and policy. Under these assumptions the SCFm is helpful to calculate the exact amount of consumption,
saving, investment to formulate and implement the economic plan and policy which have great impact in
macroeconomics.
References
[1]. Ando, A., Modigliani, F., (March 1963), The Life Cycle Hypothesis of Saving: Aggregate implications and Tests, American
Economic Review, Vol: 53, No: 1, pp. 55-84.
[2]. J. S. Duesenberry, (1949), Income, Saving and the Theory of Consumer Behavior. Cambridge: Harvard University Press.
[3]. Keynes, J. M. (1936), General Theory of Employment, Interest and Money, (New York: Harcourt, Brace and Co.), First Edition, p.
18-96.
[4]. Modigliani, (June 1966), The Life Cycle Hypothesis of Saving and the Demand of Wealth and Supply of capital, Social Research,
Vol: 3, pp. 160-217.
[5]. Stonier, A.W. and Hague, D.C., (1972). A Textbook of Economic Theory, 4th Edition, Prentice Hall Press.
[6]. Friedman, M., (1957), A Theory of Consumption Function, National bureau economic research general series, Princeton University
Press, Vol: 63, pp. 243-245.

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