Macroeconomics: Theory and Policy

9

Theories of Consumption

After studying this topic, you should be able to understand

• The basic principle of absolute income hypothesis is that the individual consumer will determine the fraction of his current income that he will allocate to consumption on the basis of his absolute income level.
• According to the relative income hypothesis, the fraction of a family’s income that will be allocated to consumption will depend on its income level relative to the income level of the other families with which it classifies itself.
• The permanent income hypothesis puts forward the view that consumption is related to the permanent income.
• The average propensity to consume, expressed in terms of the permanent income, is the same on an average for all ...