IBDP Individuals and Societies Macro-Economics Aggregate Demand,Determining Consumption

Determinants of consumption (C)

The levels of income are a primary determinant of consumption of nation. With rise in income, the level of consumption of households rises. With fall in national income, there is fall in consumption. A nation’s income is not equal to its consumption, but consumption is the function of NI(national Income)the households consume goods and services along with paying taxes and spend some part on imported goods with each year’s income .

Let’s take all components of Keynesian consumption function one by one before looking at its graphical presentation.

1.       Consumption:

Is ia the average propensity to consume that determine the percentage of national income that goes towards consumption. APC is Consumption(C) divided by level of national income(Y)

APC = C/Y =

2.       Savings:

It is measured as APS ie average propensity to consume. The more the income the less in the consumption in comparison to income and more will be savings. When the income is low, the consumer spends a higher proportion on income as compared to higher income groups. Thus APS is total savings (S) divided by income (Y)

APS = S/Y

3.       Taxes:

The average rate of tax( ART) is the percentage of national income that is collected in taxes. ART is taxes (T) divided by incomer(Y)

APT = T/Y

4.       Imports:

With the increase in incomes, the households consume goods and services produced abroad. These are imports to nation and thus become a part of nations AD.  It is a deduction from GDP. ART is found by dividing imports(M) by income(Y)

APM = M/Y

If we ADD all of the above it will be function of AD