Life cycle hyopothesis

Life cycle hyopothesis

Life cycle hyopothesis

this hypothesis in brief we call it as MBA Model. Because this was propounded by Modigiliani, Brunberg and Ando. According to them at the initial stages of life human being is a borrower, at middle stage of life he will be a earner and at third stage he is dissaver. therefore in the first stage consumption is greater than income, in the second stage income is greater than consumption and in the thrid stage again consumption is greater than income. Because in the initial stages of life, a person consume even at zero level of income by borrowing form others, at second stage of life, he will start to earn so that he can consume and also save some amount for future consumption. therefore in his last stage of life he will remain as dissaver as he is unable to earn. At the outset economists concluded that the relationship between consumption and income would be non proportional in the short run and proportional during the long run.

Futher in their hypotheses, they had give consumption is as a function of total resources available during the life period of human being. therefore compare it with other consumption fucntions, it is the best one as it has considered all resources are the determinants of consumption rather than either actual income, relative income or permanant income as was stated by Arthus smithies, Duesenburry and Milton friedman respectively.

At the outset, consumption will be determined by several factors among them the following are some of the importnat factors: Absolute or actual income. disposable income which is outcome after deducting taxes from actual income. relative income reveals that relative postion in the stream of same income group. permanant income means the weighted average of measured income. not only these factors, other factors such as price of good, price of substitute good, habits, tastes and preferences.

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