(i) Saving is consumption forgone.
(ii) The portion of the income not spent on consumption is saving.
(iii) If saving rises, consumption will fall.

(i) The multiplier assumes that those who earn income are likely to spend a proportion of their additional income on consumption.
(ii) In practice, people tend to spend their additional income on other items
(iii) Such expenses are known as leakages.

The term investment means purchase of stocks and shares, debentures, government bonds and equities.

Muliplier is the ratio of the change in national income to change in Investment.
K = \(\frac{ΔY}{ΔI}\)

APS is the ratio of saving to income
APS = \(\frac{S}{Y}\)

(i) The Average Propensity to Consume = \(\frac{C}{Y}\)
(ii) The Marginal Propensity to Consume = \(\frac{ΔC}{ΔY}\)
(iii) The Average Propensity to Save = \(\frac{S}{Y}\)
(iv) The Marginal Propensity to Save = \(\frac{ΔS}{ΔY}\)

(i) Hicks combined multiplier and accelerator to measure the total effect of initial investment on income.
(ii) Both induced consumption and induced investment are combined.
(iii) Also called leverage effect, it may lead the economy to a very high or low level of income propagation.
\(\mathrm{Y}=\mathrm{C}+\mathrm{I}_{\mathrm{A}}+\mathrm{I}_{\mathrm{P}}\)
Y = aggregate income
C = consumption expenditure
I_A = autonomous investment
I_B = induced private investment

(i) When income incrcases, consumption expenditure also incrcases but by a smaller amount.
(ii) The increased income will be divided in some proportion between consumption expenditure and saving.
(iii) Increase in income always leads to an increase in both consumption and saving.

MEC depends on the following 2 factors :
(1) The prospective yield from a capital asset.
(2) The supply price of a capital asset. The marginal efficiency of capital is influenced by short-run as well as long run factors.
(a) Short - Run factors:
(i) Demand for the product:
If the market for a particular good is expected to grow and its costs are likely to fall, the rate of return from investment will be high.
(ii) Liquid assets:
If the entrepreneurs are holding large volume of working capital, they can take advantage of the investment opportunities that come in their way. The MEC will be high.
(iii) Sudden changes in incomes:
If the business community gets windfall profits, or tax concession the MEC will be high. On the other hand, MEC falls with the decrease in income.
(iv) Current rate of investment:
If in a particular industry, much investment has already taken place and the rate of investment currently going on in that industry is also very large, then the marginal efficiency of capital will be low.
(v) Wales of optimism and pessimism:
If businessmen are optimistic about future, the MEC will be likely to be high. During periods of pessimism the MEC is under estimated and so will be low.
(b) Long - Run Factors:
(i) Rate of growth of population:
If population is growing at a rapid speed, it is usually believed that the demand of various types of goods will increase.
(ii) Technological progress:
If investment and technological development take place in the industry, the prospects of increase in the net yield brightens up.
(iii) Monetary and fiscal policies:
Cheap money policy and liberal tax policy pave the way for greater profit margin and so MEC is likely to be high.
(iv) Political environment :
Political stability, smooth administration, maintenance of law and order help to improve MEC.
(v) Resource avaiqability:
Cheap and abundant supply of natural resources, efficient labour and stock of capital enhance the MEC.

(i) The classical economists believed that investment depended exclusively on rate of interest.
(ii) Investment decision depends on a number of factors.
(iii) They are as follows:
(1) Rate of interest
(2) Level of uncertainty
(3) Political environment
(4) Rate of growth of population
(5) Stock of capital goods
(6) Necessity of new products
(7) Level of income of investors
(8) Inventions and innovations
(9) Consumer demand
(10 ) Policy of the state
(11) Available of capital
(12) Liquid assets of the investors

Introduction
J.M Keynes has divided factors influencing the consumption function into two namely Subjective factors and Objective factors
Subjective Factors
These factors are internal and related to psychological feelings. Keynes lists 8 motives which lead individuals to refrain from spending
Motive of precaution
To build a reserve against unforeseen contingencies. (eg.) Accidents
Motive of foresight
The desire to provide for anticipated future needs. (eg.) Old age
Motive of calculation
The desire to enjoy interest and appreciation.
Motive of improvernent
(i) The desire to enjoy for improving standard of living.
(ii) Motive of financial independence
(iii) Motive of enterprise - desire to do forward trading
(iv) Motive of pride - desire to leave a fortune
(v) Motive of avarice - miserly instinct
(vi) The government institutions, business corporations and firms may also consume mainly because of:
Motive of enterprise
The desire to get resources to carry out further capital investment without debt.
Motive of liquidity
The desire to secure liquid resources to meet emergency
Motive of improvement
The desire to secure a rising income and to demonstrate successful management
Motive of financial prudence
The desire to ensure adequate financial provision against depreciation, obsolescence and to discharge debt.
Objective Factors
They are the external factors which are real and measurable. They can be easily changed in the long run;
Income Distribution
According to VKRV Rao if incone is equally distributed propensity to consume increases
Price level
When price falls, real income rises; people consume more and save more.
Wage level
Consumption expenditure increases with a rise in wages.
Interest rate
Higher interest rate will encourage people to save more money and reduces consumption.
Fiscal Policy
When government reduces tax, disposable income rises and propensity to consume increases.
Consumer credit
The availability of consumer credit at easy installments will encourage people to buy consumer durables like car, fridge, computer
Demographic factors
(i) Size of family, stage in family life cycle, place of residence and occupation affect the consumption pattern
Duesenberry hypothesis
(i) Consumption expenditure depends on current income, past income and standard of living
(ii) As individuals are accustomed to a particular standard of living, they continue to spend the same amount on consumption
(iii) Consumption of the poor people is influenced by the rich. This is called Demonstration effect.
Windfall gain and loss
Unexpected changes in the stock market leads to gain or loss, so consumption function shifts upward or downward.
Conclusion
According to Keynes only the subjective factors do not change in the short-run, so consumption function remains stable in the short period.