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Consumption function
 
 
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In economics
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
, the consumption function is a single mathematical function used to express consumer spending. It was developed by John Maynard Keynes and detailed most famously in his book The General Theory of Employment, Interest, and Money. The function is used to calculate the amount of total consumption
Consumption (economics)

Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally consumption is defined by opposition to Production theory basics....
 in an economy
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
. It is made up of autonomous consumption
Autonomous consumption

Autonomous consumption is a term used to describe consumption expenditure that occurs when income levels are zero. Such consumption is considered autonomous of income only when expenditure on these consumables does not vary with changes in income....
 that is not influenced by current income and induced consumption
Induced consumption

Induced consumption is a term used to describe consumption expenditure by households on goods and services which varies with income. Such consumption is considered induced by income when expenditure on these consumables varies as income changes....
 that is influenced by the economy's income level.

The simple consumption function is shown as the linear function
Linear function

In mathematics, the term linear function can refer to either of two different but related concepts: a first-degree polynomial function of one variable; or a map between two vector spaces that preserves vector addition and scalar multiplication....
:

where

Autonomous consumption represents consumption when income is zero.






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In economics
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
, the consumption function is a single mathematical function used to express consumer spending. It was developed by John Maynard Keynes and detailed most famously in his book The General Theory of Employment, Interest, and Money. The function is used to calculate the amount of total consumption
Consumption (economics)

Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally consumption is defined by opposition to Production theory basics....
 in an economy
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
. It is made up of autonomous consumption
Autonomous consumption

Autonomous consumption is a term used to describe consumption expenditure that occurs when income levels are zero. Such consumption is considered autonomous of income only when expenditure on these consumables does not vary with changes in income....
 that is not influenced by current income and induced consumption
Induced consumption

Induced consumption is a term used to describe consumption expenditure by households on goods and services which varies with income. Such consumption is considered induced by income when expenditure on these consumables varies as income changes....
 that is influenced by the economy's income level.

The simple consumption function is shown as the linear function
Linear function

In mathematics, the term linear function can refer to either of two different but related concepts: a first-degree polynomial function of one variable; or a map between two vector spaces that preserves vector addition and scalar multiplication....
:

where
  • C = total consumption,
  • c0 = autonomous consumption (c0 > 0),
  • c1 is the marginal propensity to consume
    Marginal propensity to consume

    In economics, the marginal propensity to consume is an empirical metric that quantifies induced consumption, the concept that the increase in personal consumer spending that occurs with an increase in disposable income ....
     (ie the induced consumption) (0 < c1 < 1), and
  • Yd = disposable income (income after taxes and transfer payments, or W – T).


Autonomous consumption represents consumption when income is zero. In estimation, this is usually assumed to be positive. The marginal propensity to consume (MPC), on the other hand measures the rate at which consumption is changing when income is changing. In a geometric fashion, the MPC is actually the slope of the consumption function.

The MPC is assumed to be positive. Thus, as income increases, consumption increases. However, Keynes mentioned that the increases (for income and consumption) are not equal. According to him, "as income increases, consumption increases but not by as much as the increase in income".

The Keynesian consumption function is also known as the absolute income hypothesis, as it only bases consumption on current income and ignores potential future income (or lack of). Criticism of this assumption lead to the development of Milton Friedman
Milton Friedman

Milton Friedman was an United States economist, statistician and public intellectual, and a recipient of the Nobel Memorial Prize in Economic Sciences....
's permanent income hypothesis
Permanent income hypothesis

The permanent income hypothesis is a theory of Consumption that was developed by the American economist Milton Friedman. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are determined not by Present income but by their longer-term income expectations....
 and Franco Modigliani
Franco Modigliani

Franco Modigliani was an Italian-American economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985....
's life cycle hypothesis
Life Cycle Hypothesis

The Life Cycle Hypothesis is an economics concept analysing individual consumption patterns. It was developed by the economists Irving Fisher, Roy Harrod, Alberto Ando and Franco Modigliani....
.

See also

  • Permanent income hypothesis
    Permanent income hypothesis

    The permanent income hypothesis is a theory of Consumption that was developed by the American economist Milton Friedman. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are determined not by Present income but by their longer-term income expectations....
  • Life cycle hypothesis
    Life Cycle Hypothesis

    The Life Cycle Hypothesis is an economics concept analysing individual consumption patterns. It was developed by the economists Irving Fisher, Roy Harrod, Alberto Ando and Franco Modigliani....
  • Consumption (economics)
    Consumption (economics)

    Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally consumption is defined by opposition to Production theory basics....
  • Aggregate demand
    Aggregate demand

    In economics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels....
  • Measures of national income and output
    Measures of national income and output

    A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including Gross Domestic Product , Gross National Product , and Net National Income ....


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