Consumption function facts for kids

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.

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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.

(Undergraduate level discussion of the subject.) (Graduate level discussion of the subject.)

Consumption function facts for kids

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See also