Induced consumption

Induced consumption is the part of consumption that changes with disposable income. It is when there is a change in disposable income “induces” (persuades or makes someone want to do something) a change in consumption on goods and services. In contrast, spending for autonomous consumption do not change with income. For example, spending on a consumable that is considered a normal good would be considered to be induced.

In the simple linear consumption function,

$C=a+b\times Y_d$

induced consumption is represented by the term $b\times Y_d$, where $Y_d$ shows disposable income. $b$ is called the marginal propensity to consume.

References

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