level plays an important role in determining the consumption function. When the price falls, real income goes up; people will consume more and propensity to save of the society increases. ) Wage level Wage level plays an important role in determining the consumption function and there is positive relationship between wage and consumption. Consumption expenditure increases with the rise in wages.
Similar is the effect with regard to windfall gains. ) Interest rate Rate of interest plays an important role in determining the consumption function. Higher rate of interest will encourage people to save more money and to reduce consumption. ) Fiscal Policy When government reduces the tax the disposable income rises and the propensity to consume of community increases.
The progressive tax system increases the propensity to consume of the people by altering the income distribution in favour of poor. ) Consumer credit The availability of consumer credit at easy installments will encourage households to buy consumer durables like automobiles, fridge, computer etc. This pushes up consumption. ) Demographic factors Ceteris paribus, the larger the size of the family, the grater is the consumption.
Besides size of family, stage in family life cycle, place of residence and occupation affect the consumption function. Families with children of college education stage spend more than those with children of primary education and urban families spend more than rural families. ) Duesenberry hypothesis Duesenberry has made two observations regarding the factors affecting consumption. - - Consumption and Investment Functions