Induced and Autonomous Investment

Investment is an important determinant of the Aggregate demand and thereby of the level of income, output and employement.Investment is taken in the sense of real investment.

Investment refers to that part of the aggregate output which takes the form of new plants, new capital equipments and machinery, new structures (factories, office building, residential houses etc.) and addition to business inventories (stock of goods).

Private and Public Investment

Private Investment:

It refers to expenditure by private investors on the purchase of such goods which add to their stock of capital.

Investment implies increase in the stock of capital, also called Capital Formation.

Rate of interest is the principal determinants of private investment.

Higher rate of interest generally implies lower investment expenditure.

Investment in private sector is motivated solely by profit motive.

Public Investment:

Investment undertaken by the government is known as public investment.

The government often invest in projects like road, dams, schools, colleges, housing etc.

Public investment is largely motivated by public welfare.

Saving Function (2)

As we have already understood various components of savings, now here we will understand the saving function graphically. 

Tabular explanation of Consumption function

Y(Rs)	C (Rs)	S ( Y- C)
0 20 40 60 80 100 120	30 35 40 45 50 55 60	-30 -15 0 15 30 45 60

The above table shows:

Like consumption, saving is an increasing function of the level of income, i.e. the amount of saving increases with an increase in the level of income.

Saving Function

Saving is the excess of income over consumption during an accounting year. Algebraically, saving (S) is defined as: 

S = Y – C, where Y is income and C is consumption 

Since income is either spent or saved, there is a close relationship between consumption and saving,
i.e. the part of income which is not consumed is saved and the part of income which is not saved is used in the form of consumption expenditure.

Like consumption, saving is an increasing function of the level of income, i.e. 

the amount of saving increases with an increase in the level of income.

Thus, S = f (Y)

Propensity to save

Propensity to save is the ratio between S and Y. 

It shows the level of S with respect to a given level of Y. 

Like propensity to consume, propensity to save also has two aspects:

1) Average propensity to save

2) Marginal propensity to save

Consumption Function

The amount of money spent by the people on the purchase of goods and services in order to satisfy their wants directly is called consumption expenditure. 

Consumption function or propensity to consume shows the relationship between total desired consumption spending by the households and the factors that determine it. The factors that can affect consumption of a person are income, rate of interest, wealth, liquid assets, future expectation about income, consumer credit, distribution of income, etc.

However among all the factors mentioned above Income is considered to be a major factor of propensity to consume.

Keynesian theory of consumption function, therefore, shows the functional relationship between the desired consumption expenditure and income.

Propensity to consume has two aspect:

1) Average propensity to consume

2) Marginal propensity to consume