Consumption Function

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.

It captures the fundamental psychological law put forth by Keynes that consumption expenditures by the household sector depend on income and than only a portion of additional income is used for consumption. This is explained by the fact that disposable income is divided on consumption and savings and the growth of disposable income increases consumption and savings.

Yd = C + S,

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.

The simple consumption function is shown as the linear function:

C = c⁰ + mpc*Y^d

where:

C – total consumption,

c⁰ – autonomous consumption (c⁰ > 0),

mpc – the marginal propensity to consume

(ie the induced consumption) (0 < mpc < 1),

Y^d – disposable income (income after taxes and transfer payments, or W – T).

Consumption function expresses the ratio of consumption to total income for a number of years

1) C > Y (possible only using credits)

2) Area of net savings

3) Area of consumption

Autonomous consumption (also exogenous 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. If income levels are actually zero, this consumption counts as dissaving, because it is financed by borrowing or using up savings.

Induced consumption describes 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.

Дата добавления: 2014-01-11