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had planned to consume during the same period. Similarly, investment can mean the amount a producer plans to add to her inventory. It may be different from what she ends up doing. Suppose the producer plans to add Rs 100 worth goods to her stock by the end of the year. Her planned investment is, therefore, Rs 100 in that year. However, due to an unforeseen upsurge of demand for her goods in the market the volume of her sales exceeds what she had planned to sell and, to meet this extra demand, she has to sell goods worth Rs 30 from her stock. Therefore, at the end of the year, her inventory goes up by Rs (100 – 30) = Rs 70 only. Her planned investment is Rs 100 whereas her actual, or ex post, investment is Rs 70 only. We call the planned values of the variables – consumption, investment or output of final goods – their ex ante measures. In simple words, ex-ante depicts what has been planned, and ex-post depicts what has actually happened. In order to understand the determination of income, we need to know the planned values of different components of aggregate demand. Let us look at these components now. 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. We can describe this function as: C =C+cY (4.1) 54 The above equation is called the consumption function. Here C is the consumption expenditure by households. This consists of two i o components autonomous consumption and induced consumption ( cY ). c r Autonomous consumption is denoted by C and shows the consumption a which is independent of income. If consumption takes place even when M income is zero, it is because of autonomous consumption. The induced o u component of consumption, cY shows the dependence of consumption o on income. When income rises by Re 1. induced consumption rises by n MPC i.e. c or the marginal propensity to consume. It may be explained I as a rate of change of consumption as income changes. ∆C MPC = = c ∆Y Now, let us look at the value that MPC can take. When income changes, change in consumption (∆C) can never exceed the change in income (∆Y) . The maximum value which c can take is 1. On the other hand consumer may choose not to change consumption even when income has changed. In this case MPC = 0. Generally, MPC lies between 0 and 1 (inclusive of both values). This means that as income increases either Reprint 2026-27