Consumption function

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

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

C=a+b\times Y_{d}

where $a$ is the autonomous consumption that is independent of disposable income; in other words, consumption when there is no income. The term $b\times Y_{d}$ 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 $Y_{d}$ and C.

References

↑ Algebraically, this means $C=f(Y_{d})$ where $f\colon \mathbb {R} ^{+}\to \mathbb {R} ^{+}$ is a function that maps levels of disposable income $Y_{d}$ —income after government intervention, such as taxes or transfer payments—into levels of consumption $C$ .
↑ 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.

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

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[1] Algebraically, this means $C=f(Y_{d})$ where $f\colon \mathbb {R} ^{+}\to \mathbb {R} ^{+}$ is a function that maps levels of disposable income $Y_{d}$ —income after government intervention, such as taxes or transfer payments—into levels of consumption $C$ .

[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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Consumption function

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