When other factors of production can be easily substituted for the category of labour (substitution effect).
When the supply of other factors of production is highly elastic (that is, usage of other factors of production can be increased without substantially increasing their prices) (substitution effect). That is, employers cannot easily replace labour as doing so will lead to a large increase in other factor prices making it useless.
Thus, in consumption function we came to know about consumption expenditure. But in Marshall’s discovery we studied about the demand function. So, in economics consumption function is much more better than Marshall’s discovery of demand function.
ANS2. Investment also decrease if saving dropped sharply in the economy because investment in our economy largely depends upon the saving. When the person does not have much saving power and then they will not be able to deposit his saving into bank. When bank get no saving of the people ultimately then banks does not have sufficient money to give loans to the business firms and bank interest rate rises because of less saving of people in bank and when bank rate of interest increases business firm taken less loan from bank and finally investment decreases. Thus, investment is largely depending upon the savings of the people.
ANS3.The various fiscal measures the government of India has taken recently to increase the level of aggregate demand in the economy are:
Taxation and work incentives
Consider the impact of an increase in the basic rate of income tax or an increase in the rate of national insurance contributions. The rise in direct tax has the effect of reducing the post-tax income of those in work because for each hour of work taken the total net income is now lower. This might encourage the individual to work more hours to maintain his/her target income. Conversely, the effect might be to encourage less work since the higher tax might act as a disincentive to work. Of course many workers have little flexibility in the hours that they work. They will be contracted to work a certain number of hours, and changes in direct tax rates will not alter that.
The government has introduced a lower starting rate of income tax for lower income earners. This is designed to provide an incentive for people to work extra hours and keep more of what they earn.
Changes to the tax and benefit system also seek to reduce the risk of the ‘poverty trap’ – where households on low incomes see little net financial benefit from supplying extra hours of their labour. If tax and benefit reforms can improve incentives and lead to an increase in the labour supply, this will help to reduce the equilibrium rate of unemployment (the NAIRU) and thereby increase the economy’s non-inflationary growth rate.
Taxation and the Pattern of Demand
Changes to indirect taxes in particular can have an effect on the pattern of demand for goods and services. For example, the rising value of duty on cigarettes and alcohol is designed to cause a substitution effect among consumers and thereby reduce the demand for what are perceived as “de-merit goods”. In contrast, a government financial subsidy to producers has the effect of reducing their costs of production, lowering the market price and encouraging an expansion of demand.
The use of indirect taxation and subsidies is often justified on the grounds of instances of market failure. But there might also be a justification based on achieving a more equitable allocation of resources – e.g. providing basic state health care free at the point of use.
Taxation and business investment decisions
Lower rates of corporation tax and other business taxes can stimulate an increase in business fixed capital investment spending. If planned investment increases, the nation’s capital stock can rise and the capital stock per worker employed can rise.
The government might also use tax allowances to stimulate increases in research and development and encourage more business start-ups. A favorable tax regime could also be attractive to inflows of foreign direct investment – a stimulus to the economy that might benefit both aggregate demand and supply. The Irish economy is often touted as an example of how substantial cuts in the rate of corporation tax can act as a magnet for large amounts of inward investment.
Make My Assignment Consumption Investment And Monetary Policy Economics Essay