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Definitions: Consumption Function

This document defines key economic terms related to consumption, saving, and income. It defines the consumption function and saving function as showing the relationship between planned consumption/saving and disposable income. It provides the standard Keynesian consumption function, which states that consumption (C) equals autonomous consumption (a) plus the marginal propensity to consume (mpc) multiplied by disposable income (Yd). It also discusses the aggregate expenditure function and defines terms like marginal propensity to consume (MPC) and marginal propensity to save (MPS).

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165 views

Definitions: Consumption Function

This document defines key economic terms related to consumption, saving, and income. It defines the consumption function and saving function as showing the relationship between planned consumption/saving and disposable income. It provides the standard Keynesian consumption function, which states that consumption (C) equals autonomous consumption (a) plus the marginal propensity to consume (mpc) multiplied by disposable income (Yd). It also discusses the aggregate expenditure function and defines terms like marginal propensity to consume (MPC) and marginal propensity to save (MPS).

Uploaded by

parnasabari
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Definitions

Consumption function
A function shows the relationship between planned consumption expenditure and disposable income in an economy.

Saving function
A function shows the relationship between planned savings and disposable income in an economy.

Disposable Income (Yd) = Gross Income - (Deductions from Direct Taxation + Benefits) The standard Keynesian consumption function is as follows:

C = a + c Yd where,
C= Consumer expenditure a = autonomous consumption. This is the level of consumption that would take place even if income was zero. If an individual's income fell to zero some of his existing spending could be sustained by using savings. This is known as dis-saving. c = marginal propensity to consume (mpc). This is the change in consumption divided by the change in income. Simply, it is the percentage of each additional pound earned that will be spent.

There is a positive relationship between disposable income (Yd) and consumer spending (Ct). The gradient of the consumption curve gives the marginal propensity to consume. As income rises, so does total consumer demand. A change in the marginal propensity to consume causes a pivotal change in the consumption function. In this case the marginal propensity to consume has fallen leading to a fall in consumption at each level of income. This is shown below:

Aggregate expenditure function A function shows the relationship between planned aggregate expenditure and income in an economy.

Definitions
Marginal propensity to consume (MPC) An index which tells how much of an increase in national income will be developed to increase consumption spending. Marginal propensity to save (MPS) An index which tells how much of an increase in national income will be developed to increase savings spending.

Discussion
Now, if we want to know how much the class wants to spend on consumption for every dollar it earns in a month, how can we find out?
We can calculate: The proportion of C to income (Y) A ratio of C/Y Average Propensity to Consume (APC)

Similarly, the ratio of S/Y is called Average Propensity to Save (APS) which shows how much the class

MPC & MPS


MPC + MPS = 1

MPC (MPS) is the slope of the consumption (savings) function in an income-expenditure diagram.

Every time there is an injection of new demand into the circular flow there is likely to be a multiplier effect. This is because an injection of extra income leads to more spending, which creates more income, and so on. The multiplier effect refers to the increase in final income arising from any new injection of spending.

he size of the multiplier depends upon households marginal decisions to spend, called the marginal propensity to consume (mpc), or to save, called the marginal propensity to save (mps). It is important to remember that when income is spent, this spending becomes someone elses

Tnsities show the proportion of extra income allocated to particular activities, such as investment spending by UK firms, saving by households, and spending on imports from abroad. For example, if 80% of all new income in a given period of time is spent on UK products, the marginal propensity to consume would be 80/100,

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