Consumption function facts for kids

The consumption function is a big idea in economics. It helps us understand how much people spend. It shows the connection between how much money people have to spend (their disposable income) and how much they actually spend (their consumption).

This picture shows the consumption function. "a" is money spent even with no income. "b" is how much more is spent when income goes up. "Yd" is the money you have after taxes.

What is the Consumption Function?

This idea was first shared by a famous economist named John Maynard Keynes in 1936. He used it to explain how government spending can affect the economy.

Understanding the Spending Formula

The simplest way to write the consumption function looks like this:

Let's break down what each part means:

• C stands for consumption. This is the total amount of money that households spend on goods and services.
• a stands for autonomous consumption. This is the money people spend even if they have no income at all. Think of it as the basic spending you need for things like food and shelter, even if you're not earning.
• b stands for the marginal propensity to consume (MPC). This is a fancy way of saying: how much more money do people spend when they get an extra dollar of disposable income? For example, if 'b' is 0.8, it means for every extra dollar you get, you spend 80 cents of it.
• Yd stands for disposable income. This is the money you have left to spend or save after taxes have been taken out of your earnings.

So, the formula basically says: your total spending (C) is made up of your basic spending (a) plus a part that depends on how much money you have (b times Yd).

See also

In Spanish: Función de consumo para niños