Consumption function
In economics, the consumption function shows a relationship between consumption and disposable income.[1][2] 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.[3]
Details
Its simplest form is the linear consumption function. It is used often in simple Keynesian models:[4]
- [math]\displaystyle{ C = a + b \times Y_{d} }[/math]
where [math]\displaystyle{ a }[/math] is the autonomous consumption that is independent of disposable income; in other words, consumption when there is no income. The term [math]\displaystyle{ b \times Y_{d} }[/math] 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 [math]\displaystyle{ Y_{d} }[/math] and C.
References
- ↑ Algebraically, this means [math]\displaystyle{ C = f(Y_{d}) }[/math] where [math]\displaystyle{ f \colon \mathbb{R}^{+} \to \mathbb{R}^{+} }[/math] is a function that maps levels of disposable income [math]\displaystyle{ Y_{d} }[/math]—income after government intervention, such as taxes or transfer payments—into levels of consumption [math]\displaystyle{ C }[/math].
- ↑ Lindauer, John (1976). Macroeconomics (Third ed.). New York: John Wiley & Sons. pp. 40–43. ISBN 0-471-53572-9.
- ↑ Hall, Robert E.; Taylor, John B. (1986). "Consumption and Income". Macroeconomics: Theory, Performance, and Policy. New York: W. W. Norton. pp. 63–67. ISBN 0-393-95398-X.
- ↑ Colander, David (1986). Macroeconomics: Theory and Policy. Glenview: Scott, Foresman and Co. pp. 94–97. ISBN 0-673-16648-1.
More reading
- Poindexter, J. Carl (1976). "The Consumption Function". Macroeconomics. Hinsdale: Dryden Press. pp. 113–141. ISBN 0-03-089419-0. (Undergraduate level discussion of the subject.)
- Sargent, Thomas J. (1979). "The Consumption Function". Macroeconomic Theory. New York: Academic Press. pp. 298–323. ISBN 0-12-619750-4. (Graduate level discussion of the subject.)
