Tamilnadu Samacheer Kalvi 12th Economics Notes Chapter 4 Consumption and Investment Functions Notes
→ The chapter consumption function and investment function can be summarised under three heads.
→ The consumption function deals with relationship between national income and consumption expenditure Viz APC, MPC and APS, MPS.
→ The subjective and objective factors determine consumption function.
→ The investment function includes autonomous investment and the induced investment, the functional relationship between interest rate and the investment, the role of MEC and rate of interest in determining the investment.
→ The multiplier is directly related to MPC and inversely related to MPS.
→ The accelerator principle explains the effect of changing consumption expenditure upon volume of investment.
→ The interaction of multiplier and accelerator is called super multiplier.
→ Accelerator: ratio of change in induced investment to change in consumption, (or) Technical relationship between change in capital stock and change in level of output.
→ Autonomous Consumption: Autonomous consumption is the minimum level of consumption or spending that must take place even if a consumer has no disposable income, such as spending for basic necessities.
→ Autonomous Investment: Additional investment that is independent of income.
→ Average Propensity to Consume (APC): Ratio of the consumption expenditure to income. C/Y
→ Average Propensity to Save (APS): Ratio of the saving to income. S/Y
→ Consumption function: The relationship between consumption and income, the tendency to imitate superior consumption pattern. Additional investment demand that results from an increase in domestic product (GDP).
→ Demonstration effect: Ratio of change in consumption to change in income. ΔC/ΔY
→ Induced investment: Ratio of change in saving to change in income. ΔS/ΔY
→ Marginal Propensity to Consume (MPC): Marginal Propensity to Save (MPS): ratio of change in income to change in investment. ΔY/ ΔI
→ Multiplier: External factors which are real and measurable.
→ Objective Factors Subjective Factors: Internal factors related to Psychological feeling.
→ Super Multiplier: The combined effect of interaction of multiplier and accelerator.