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In economics, the consumption function describes a relationship between consumption and disposable income.[1][2] The concept is believed to have been introduced into macroeconomics by John Maynard Keynes in 1936, who used it to develop the notion of a government spending multiplier.[3]

Contents

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

Details[edit] Its simplest form is the linear consumption function used frequently in simple Keynesian models:[4]

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)

.[5] 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

< 0

displaystyle partial ^ 2 C/partial Y_ d ^ 2 <0

.[6] If this assumption is to be used, it would result in a nonlinear consumption function with a diminishing slope. Further theories on the shape of the consumption function include James Duesenberry's (1949) relative consumption expenditure,[7] Franco Modigliani
Franco Modigliani
and Richard Brumberg's (1954) life-cycle hypothesis, and Milton Friedman's (1957) permanent income hypothesis.[8] Some new theoretical works are based, following Duesenberry's one, on behavioral economics and suggest that a number of behavioural principles can be taken as microeconomic foundations for a behaviorally-based aggregate consumption function.[9] See also[edit]

Aggregate demand Consumption (economics) Life cycle hypothesis Measures of national income and output Permanent income hypothesis

Notes[edit]

^ Algebraically, this means

C = f (

Y

d

)

displaystyle C=f(Y_ d )

where

f :

R

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
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 [and women] 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. 

Further reading[edit]

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.)

External links[edit]

An essay examining the strengths and weaknesses of Keynes's theory of consumption

v t e

Consumption

Topics

Consumption function Final consumption expenditure Instant gratification Intertemporal consumption Random walk hypothesis Autonomous consumption Induced consumption Conspicuous consumption

Theories

Absolute income hypothesis Life-cycle hypothesis Permanent income hypothesis Random walk model of consumption Relative income hypothesis

Lists

List of largest consumer markets

v t e

Consumer behaviour

Concepts

Consumption Autonomous consumption Induced consumption Consumer culture theory Consumer debt Consumer economy Consumer spending

Research types

Consumer behaviour Consumer choice Consumer economics Consumer neuroscience Consumer product Marketing research

Consumer attributes

Consumer confidence Consumer confusion Consumer ethnocentrism Consumer socialization Consumer's risk Consumption function Cultural consumer Homo economicus

Processes

Consumers' co-operative Consumer-to-business Factory-to-consumer Consumer servi

.