Consumption function

Graphical representation of the consumption function, where a is autonomous consumption (affected by interest rates, consumer expectations, etc.), b is the marginal propensity to consume and Yd is disposable income.

In economics, the consumption function shows a relationship between consumption and disposable income. 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.

Details

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

$C=a+b\times Y_d$

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.

More reading

• Template:Cite book (Undergraduate level discussion of the subject.)
• Template:Cite book (Graduate level discussion of the subject.)

Other websites

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