Aggregate Demand and its components
The theory of income determination as given by John Maynard Keynes is based on the assumption that all the variables in the theory are Ex-ante. The theory of income determination is based on the analysis of Aggregate Demand and Aggregate Supply. The most important determinant of consumption demand is household income. A consumption function describes the relation between consumption and income. The simplest consumption function assumes that consumption changes at a constant rate as income changes. Even if income is zero, there is some consumption. This level of consumption is independent of income. There is another component of the consumption function which depends on the marginal propensity to consume (MPC) and hence is a dependent variable. While the average propensity to consume (APC) is the consumption per unit of income, the marginal propensity to consume is the rate of change in consumption due to income change.
The other part of the household income is savings. It is that part of the income which is not consumed. The average propensity to save (APS) is savings per unit of income. APS can be negative. It is when there is some consumption even at zero level of income or till that level of income, where consumption is greater than Income.
The components of consumption function are:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Autonomous consumption and Induced consumption
Even a household with no income must eat, so some consumption takes place at zero income; and as income rises, consumption rises with it. The passage describes these two parts of the consumption function, C = C̄ + cY:
Autonomous consumption, C̄: the consumption that takes place even when income is zero; it is independent of income.
Induced consumption, cY: it depends on income and rises by the MPC, c, with every rupee of extra income.
Why the other options are incorrect
Option (1) Marginal propensity to consume and average propensity to consume — Incorrect. MPC and APC are ratios that describe the consumption function; they are not the amounts of consumption that make it up.
Option (2) Autonomous consumption and autonomous investment — Incorrect. Investment is a separate component of aggregate demand, not a part of consumption.
Option (3) Induced consumption and autonomous investment — Incorrect. Induced consumption is one part, but autonomous investment belongs to aggregate demand, not to the consumption function.
NCERT (2025-26): “4.1.1. Consumption The most important determinant of consumption demand is household income. A consumption function describes the relation between consumption and income. The simplest consumption function assumes that consumption changes at a constant rate as income changes. Of course, even if income is zero, some consumption still takes place. Since this level of consumption is independent of income, it is called autonomous consumption.… …The above equation is called the consumption function. Here C is the consumption expenditure by households. This consists of two components autonomous consumption and induced consumption (cY).… …If consumption takes place even when income is zero, it is because of autonomous consumption. The induced component of consumption, cY shows the dependence of consumption on income.…” |