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]

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.

Details

Its simplest form is the linear consumption function. It is used often in simple Keynesian models:^[4]

${\displaystyle C=a+b\times Y_{d}}$

where ${\displaystyle a}$ is the autonomous consumption that is independent of disposable income; in other words, consumption when there is no income. The term ${\displaystyle b\times Y_{d}}$ 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 ${\displaystyle Y_{d}}$ and C.