Cyclical and Secular Consumption

It is very difficult to determine the behaviour of consumption over a period of time. All that we learn from Keynes’ psychological law of consumption is that in the short period (cyclically) the consumers do not spend the entire increment of income and the MPC is less than one. In other words, in the short period, the consumption function is stable, i.e., there are no shifts in the consumption function. In the long period (secularly), however, this may not be the case. The shape, position and slope of the consumption function change in the long-run on account of certain dynamic influences like the population growth, changes in capital stock, inventions, etc.

These influences become the cause of shifts in consumption function in the long-run. As a result of historical experience and research in business cycle studies, it has been established that in the short period (cyclically) there is a lagged adjustment between income and consumption, i.e., consumption rises and falls cyclically less than in proportion to the rise and fall in real income.

In other words, it means that in the short period there is not enough time for consumption to adjust itself with income, so that when income rises, consumption does not rise to the same extent and when income falls, consumption does not fall to the same extent, i.e., consumption always lags behind. As regards the long period (secularly), research and experience of various economists show that consumption has gone up more or less in proportion to a rise in income.

Another way to understand the distinction between the two w functions is to describe the short-run consumption function as non- proportional and the long-run consumption function as proportional. It is because, in the short-run, consumption does not change proportionally with income, thus proportion rises instead with falling income and falls with rising income. Whereas in the long-run, consumption changes proportionally with income it remains roughly the same proportion of income as the level of income doubles and redoubles over the decades that make up the long-run. Thus, we may sum up by saying that the consumption income relationship is non-proportional in the short-run and proportional in the long-run.

The short-term and long-term consumption curves are shown in Fig. 13.4. At income OY1, consumption equals Y1M; when income falls, consumption does not follow along the ML line but along the short- term consumption curve MC1. When income rises again, consumption rises along the straight line C1M and then straight line MC1. Similar phenomena occur when income falls at higher levels (e.g., OY2 and OY3).

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