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The important factor influencing the propensity to consume in an economy is
  • a)
    The level of investment
  • b)
    The level of consumption
  • c)
    The level of income (Y)
  • d)
    The level of savings
Correct answer is option 'C'. Can you explain this answer?
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Verified Answer
The important factor influencing the propensity to consume in an econo...
The main factors that drive the marginal propensity to consume (MPC) are the availability of credit, taxation levels, and consumer confidence. According to Keynesian economic theory, the propensity to consume can be influenced by government economic policy that is the level of income.
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The important factor influencing the propensity to consume in an econo...
Propensity to Consume in an Economy

Propensity to consume refers to the proportion of income that is spent on consumption. It is an important factor in determining the level of aggregate demand in an economy. The higher the propensity to consume, the higher the level of aggregate demand.

Level of Income (Y)

The level of income is the most important factor influencing the propensity to consume in an economy. As income increases, people tend to spend more on consumption, which in turn increases the level of aggregate demand.

As income increases, people tend to have more disposable income, which is the income that is left after taxes and other mandatory expenses. This disposable income can be used to purchase goods and services, which increases the level of consumption.

The relationship between income and consumption is known as the consumption function. The consumption function can be represented by the equation C = a + bY, where C is consumption, Y is income, a is autonomous consumption, and b is the marginal propensity to consume.

The marginal propensity to consume (MPC) is the proportion of additional income that is spent on consumption. For example, if the MPC is 0.8, it means that for every additional dollar of income, 80 cents will be spent on consumption.

Conclusion

In conclusion, the level of income is the most important factor influencing the propensity to consume in an economy. As income increases, people tend to spend more on consumption, which in turn increases the level of aggregate demand. The consumption function can be represented by the equation C = a + bY, where C is consumption, Y is income, a is autonomous consumption, and b is the marginal propensity to consume.
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Similar UPSC Doubts

In a poor country like India, as income rises people first concentrate on increasing their consumption of what they regard as basic or more essential consumer goods. For the poor, these goods would primarily include cereals and for people at successive levels of higher income protective foods, simple non-food consumer goods, more modern, better quality non-food consumer goods and simple consumer durables, better quality consumer goods, and so on. When the demand for basic and more essential consumer goods is more or less met, demand for the next higher level of consumer goods begins to impinge on consumer decision making and their consumption increases. There is thus a hierarchy of income levels and a hierarchy of consumer goods. As incomes rise and one approaches the turning point referred to, there is an upward movement along the hierarchy in the demand for consumer goods which exhibits itself in a relative increase in the demand for these goods. If one examines the past consumption behaviour of households in India, one finds confirmation of the proposition just made. Until the mid seventies one notices a rise in the proportion of consumption expenditure on cereals, and thereafter, a steady decline reflecting a progressive increase in the relative expenditure on non-cereal or protective foods. About the same time the rising trend in the share of food in total consumption expenditure also begins to decline, raising the proportion of expenditure on non-food consumer goods. Simultaneously one also notices a sharper rise in the proportion of expenditure on consumer durables. Thus, what one sees is an upward movement in consumer demand along the hierarchy of consumer goods which amounts to a major change in consumer behaviour.Prices of protective food have risen because

In a poor country like India, as income rises people first concentrate on increasing their consumption of what they regard as basic or more essential consumer goods. For the poor, these goods would primarily include cereals and for people at successive levels of higher income protective foods, simple non-food consumer goods, more modern, better quality non-food consumer goods and simple consumer durables, better quality consumer goods, and so on. When the demand for basic and more essential consumer goods is more or less met, demand for the next higher level of consumer goods begins to impinge on consumer decision making and their consumption increases. There is thus a hierarchy of income levels and a hierarchy of consumer goods. As incomes rise and one approaches the turning point referred to, there is an upward movement along the hierarchy in the demand for consumer goods which exhibits itself in a relative increase in the demand for these goods. If one examines the past consumption behaviour of households in India, one finds confirmation of the proposition just made. Until the mid seventies one notices a rise in the proportion of consumption expenditure on cereals, and thereafter, a steady decline reflecting a progressive increase in the relative expenditure on non-cereal or protective foods. About the same time the rising trend in the share of food in total consumption expenditure also begins to decline, raising the proportion of expenditure on non-food consumer goods. Simultaneously one also notices a sharper rise in the proportion of expenditure on consumer durables. Thus, what one sees is an upward movement in consumer demand along the hierarchy of consumer goods which amounts to a major change in consumer behaviour.As income rises in a poor country like India, the poor people concentrate on increasing their consumption of

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The important factor influencing the propensity to consume in an economy isa)The level of investmentb)The level of consumptionc)The level of income (Y)d)The level of savingsCorrect answer is option 'C'. Can you explain this answer?
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