Consumption function

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In economics, 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 in an economy. It is made up of autonomous consumption that is not influenced by current income and induced consumption that is influenced by the economy's income level. This function can be written in a variety of ways, an example being $C=a+b(Y-T)$ . This is probably the most simplistic form of the consumption function.

The simple consumption function is shown as the affine function:

$C=c_{0}+c_{1}Y^{d}$

where

C = total consumption,
c₀ = autonomous consumption (c₀ > 0),
c₁ is the marginal propensity to consume (ie the induced consumption) (0 < c₁ < 1), and
Y^d = disposable income (income after government intervention – benefits, taxes and transfer payments – or Y + (G – 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's permanent income hypothesis and Franco Modigliani's life cycle hypothesis. More recent theoretical approaches^[1] are based on behavioral economics and suggest that a number of behavioural principles can be taken as microeconomic foundations for a behaviourally-based aggregate consumption function.

Notes

↑ D'Orlando, F. and Sanfilippo, E. (2010). Behavioral foundations for the Keynesian Consumption Function, in Journal of Economic Psychology, 31 (6), pp. 1035-1046

External links

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 (economics) Consumer spending Autonomous consumption Induced consumption Consumer debt Consumer economy Consumer culture theory

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

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

Processes	Consumer cooperative Consumer-to-business Factory-to-consumer Consumer service Consumerization

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Consumption function

See also

Notes

External links