Factors or determinates affecting consumption function

According to Keynes, the factors affecting consumption function can be broadly classified into two categories:- 1)Objective factors, 2)Subjective factors

1)    Objective factors:-The objective factors are exogenous in nature and cause shift in the consumption function. Following are the main objective affecting consumption function ---

(a)  Changes in wage level:-In general, there is positive relationship between wage and consumption expenditure. If the wage rate rises, consumption function shifts upward and vice versa.

(b)  Distribution of income:-Consumption function not only depends upon income, but also on the way in which the income is distributed. Greater the inequality in income distribution lower will be the propensity to consume and greater the equality in income distribution, higher will be the propensity to consume.

(c)   Windfall gains and losses:-windfall gains and losses also affect consumption function. Windfall gained tends to raise the propensity to consume while windfall losses are likely to shift the consumption function downward.

(d)  Introduction of new products:-Introduction of new products in the market, by changing the scale of preferences of the consumer, leads to increase in consumption expenditure.

2) Subjective factors:-Subjective factors are endogenous in nature which determines the slope and position of consumption function. According to Keynes there are eight motives which leave the individual to refrain from spending out of their income.

a) To build the reserve for unforeseen contingencies like death, diseases etc.

b) To provide for anticipated future needs like retirement, future higher studies of children.

c) To enjoy an enlarged future income by investing funds of correct income.

d) To enjoy a sense of independence.

e) To process power or to get higher social or political status.

f) To secure enough funds to carry out speculation because speculation is an essential part of money market.

g) To bequeath a fortune. (Bequeath means give or hand on)

h) To satisfy purely, miserly, instinct.