Question

2. Explain why current consumption is likely to respond less than one for one to changes in current income.

Answer 1

The current consumption is likely to respond less than one to changes in current income. This is because a current income is composed of consumption and savings.

Or, Current disposable income = Consumption + Savings.

Now, when there is a rise in current income, the individual wants to consume some part of the increase and save some part of it. As the income keeps on increasing, individuals will tend to consumer lesser proportion of the increase and save a higher proportion of it.

This is why the consumption will not increase fully as the increase in income. This is because an individual will prefer to save as well.