Determination of Income and Employment | Class 12 Economics Notes

4.1.1 Consumption

Consumption expenditure by households primarily depends on their income. The consumption function models this relationship as C = C̄ + cY, where C is total consumption, C̄ is autonomous consumption (consumption when income is zero), and cY is induced consumption dependent on income. The marginal propensity to consume (MPC), denoted by c, measures the change in consumption per unit change in income (MPC = ΔC/ΔY). MPC ranges between 0 and 1, indicating that consumption increases by some fraction of additional income. For example, if MPC = 0.8, then for every Rs 100 increase in income, consumption increases by Rs 80. Savings (S) is the part of income not consumed, defined as S = Y - C. The marginal propensity to save (MPS), denoted by s, is the change in savings per unit change in income (MPS = ΔS/ΔY = 1 - c). Average propensity to consume (APC) and save (APS) are ratios of consumption and savings to income respectively. These concepts help understand consumer behavior and its impact on aggregate demand.

📊 Diagram: Reprint 2026-27

🧪 Activity: No specific activity mentioned in this subsection.

🔗 Connection: Leads to the study of investment as the other component of aggregate demand in section 4.1.2.