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Question
Answer in brief.
Explain the relationship between Income and Consumption.
Solution
The relation between the consumption and the income is depicted by the consumption function, also known as ‘Propensity to Consume’. It depicts how a change in the income causes a change in the consumption pattern of an individual.
C = f(Y)
Where,
C represents consumption expenditure
Y represents aggregate income; and
f represents the functional relationship between the consumption expenditure and the level of the disposable income.
According to this, as the income increases, the consumption expenditure also increases. however, the increase in the consumption expenditure is less than the increase in income.
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