Consumption Function
The rate of consumption of any population is highly influenced by a number of factors that include net taxes, interest rate, consumer optimism or confidence, the price level, disposable income and the net wealth of consumers. This paper evaluates show all these factors influence the consumption function.
Increase in the net taxes results to increase in product prices and also reduce the net earnings of a population. This causes a reduction in the consumption rate as a way of adjusting to the increased expenses and reduced earning. Increase in the interest rate also reduces the consumption function since the high interest rate makes it more expensive to acquire loans and to pay them. Thus, to be able to cover the extra interest charges, consumers must cut on their spending. Increase in the consumer optimism or confidence signifies that more consumers are more confident about the growth of the economy and stability of their earnings. In this regard, increase in consumer optimism increases their rate of spending and making purchases.
Increase in price level results to using more cash to purchase similar amount of goods that was purchased previously with less amount. This would discourage consumers from making more purchases since they will be expensive than usual. In addition, spending will be cut since the extra amount is reduced by increased prices and thus consumption function will be lowered. Increase in consumer net wealth will definitely increase their purchasing power since they will be having more cash at their disposal. In this regard, this will result to increase in consumption function. Finally, increase in disposable income would definitely increase the consumption function since consumers will have more cash to use based on their interest.
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