The Info List - Consumption Function

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In economics , the CONSUMPTION FUNCTION describes a relationship between consumption and disposable income . The concept is believed to have been introduced into macroeconomics by John Maynard Keynes
John Maynard Keynes
in 1936, who used it to develop the notion of a government spending multiplier .


* 1 Details * 2 See also * 3 Notes * 4 Further reading * 5 External links


Its simplest form is the linear consumption function used frequently in simple Keynesian models:

C = a + b Y d {displaystyle C=a+btimes Y_{d}}

where a {displaystyle a} is the autonomous consumption that is independent of disposable income; in other words, consumption when income is zero. The term b Y d {displaystyle btimes Y_{d}} is the induced consumption that is influenced by the economy's income level. The parameter b {displaystyle b} is known as the marginal propensity to consume , i.e. the increase in consumption due to an incremental increase in disposable income, since C / Y d = b {displaystyle partial C/partial Y_{d}=b} . Geometrically, b {displaystyle b} is the slope of the consumption function. One of the key assumptions of Keynesian economics
Keynesian economics
is that this parameter is positive but smaller than one, i.e. b ( 0 , 1 ) {displaystyle bin (0,1)} .

Keynes also took note of the tendency for the marginal propensity to consume to decrease as income increases, i.e. 2 C / Y d 2 R {displaystyle fcolon mathbb {R} to mathbb {R} } is a function that maps levels of disposable income Y d {displaystyle Y_{d}} —income after government intervention, such as taxes or transfer payments—into levels of consumption C {displaystyle C} . * ^ Lindauer, John (1976). Macroeconomics
(Third ed.). New York: John Wiley & Sons. pp. 40–43. ISBN 0-471-53572-9 . * ^ 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 . * ^ Colander, David (1986). Macroeconomics: Theory and Policy. Glenview: Scott, Foresman and Co. pp. 94–97. ISBN 0-673-16648-1 . * ^ Keynes, John M. (1936). The General Theory of Employment, Interest and Money . New York: Harcourt Brace Jovanovich. p. 96. The fundamental psychological law ... is that men are disposed, as a rule and on average, to increase their consumption as their income increases, but not as much as the increase in their income. * ^ Keynes, John M. (1936). The General Theory of Employment, Interest and Money . New York: Harcourt Brace Jovanovich. The marginal propensity to consume is not constant for all levels of employment, and it is probable that there will be, as a rule, a tendency for it to diminish as employment increases; when real income increases, that is to say, the community will wish to consume a gradually diminishing proportion of it. * ^ Duesenberry, J. S. (1949). Income, Saving and the Theory of Consumer Behavior. * ^ Friedman, M. (1957). A Theory of the Consumption Function. * ^ d’Orlando, F.; Sanfilippo, E. (2010). "Behavioral foundations for the Keynesian consumption function". Journal of Economic Psychology. 31 (6): 1035. doi :10.1016/j.joep.2010.09.004 .


* Poindexter, J. Carl (1976). "The Consumption Function". Macroeconomics. Hinsdale: Dryden Press. pp. 113–141. ISBN 0-03-089419-0 . (Undergraduate level discussion of the subject.) * Sargent, Thomas J. (1979). "The Consumption Function". Macroeconomic Theory. New York: Academic Press. pp. 298–323. ISBN 0-12-619750-4 . (Graduate level discussion of the subject.)