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 in 1936, who used it to develop the notion of a government spending multiplier . 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 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.)_