Consumption function or propensity to consume refers to income consumption relationship. It expresses the functional relationship between two aggregates i.e. total consumption and total volume. It had shown how consumption expenditure varies with yen changes in income.
The consumption of a community depends on the level of income. Consumption is a fraction of Income. Thus consumption function relates the amount of consumption to the level of income. Normally when income increases; consumption also increases but by less than the increase income.
Consumption rises in proportion to the rise in income. How much consumption will rise in response to a given increase in income ands on the propensity to consume Consumption is different on the propensity to consume. Consumption refers to the expenditure the consumer goods and services at a given level of income, where as propensity to consume refers to the schedule showing assumption expenditure at various levels of income.
Thus propensity consume does not mean a mere desire to consume, but the actual consumption that takes place out of varying level, of income. Schedule of consumption
At the above table it is clear that consumption expenditure does not increase in the same proportion in which income increases the income increases by Rs. 20, but the consumption expenditure increases only by 10. Thus when aggregate income increases, aggregate consumption also increases but by a somewhat smaller amount and saving increases from 40 to 50, 50 to 60, 60 to70, 70 to 80 and 80 to 90.