Consumption function

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Graphical representation of the consumption function, where a is autonomous consumption (affected by interest rates, consumer expectations, etc.), b is the marginal propensity to consume and Yd is disposable income.

In economics, the consumption function shows a relationship between consumption and disposable income.[1][2] It is believed that John Maynard Keynes introduced the idea in macroeconomics in 1936. He used it to develop the idea of a government spending multiplier.[3]

Details[change | change source]

Its simplest form is the linear consumption function. It is used often in simple Keynesian models:[4]

where is the autonomous consumption that is independent of disposable income; in other words, consumption when there is no income. The term is the induced consumption that is influenced by the economy's income level. It is generally assumed that there is no correlation or dependence between and C.

References[change | change source]

  1. Algebraically, this means where is a function that maps levels of disposable income —income after government intervention, such as taxes or transfer payments—into levels of consumption .
  2. Lindauer, John (1976). Macroeconomics (Third ed.). New York: John Wiley & Sons. pp. 40–43. ISBN 0-471-53572-9.
  3. Hall, Robert E.; Taylor, John B. (1986). "Consumption and Income". Macroeconomics: Theory, Performance, and Policy. New York: W. W. Norton. pp. 63–67. ISBN 0-393-95398-X.
  4. Colander, David (1986). Macroeconomics: Theory and Policy. Glenview: Scott, Foresman and Co. pp. 94–97. ISBN 0-673-16648-1.

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