A simple and detailed note on Consumption function.

1. The Consumption Function in
Economics
Understanding Consumer Spending & Its Impact on
the Economy
Presented by Smrutiswarupa Maharana
(B.A & M.A in economics)
Date : 01.04.2025,

2. Introduction
• - The consumption function explains how
income influences consumer spending.
• - Helps economists understand demand,
savings, and economic growth.
• - Introduced by John Maynard Keynes in the
Keynesian economic model.

3. Basic Consumption Function
Equation
• Formula: C = a + bY
• - C = Total consumption
• - a = Autonomous consumption (spending
when income is zero)
• - b = Marginal Propensity to Consume (MPC)
• - Y = Disposable income
• Example: If income increases, consumption

4. Graphical Representation of
Consumption Function
• - A graph showing
Consumption (C) vs.
Disposable Income (Y).
• - 45-degree line to indicate
when consumption equals
income.
• - Autonomous consumption
as the y-intercept.

5. Marginal Propensity to Consume
(MPC) & Save (MPS)
• - MPC: Change in
consumption due to an
increase in income.
• - MPS: Change in
savings due to an
increase in income.
• - Relationship: MPC +
MPS = 1.
• - Example: If MPC = 0.8,
then MPS = 0.2.

6. Determinants of Consumption
• - Income Levels: Higher income leads to higher
consumption.
• - Wealth: More wealth increases
consumption.
• - Interest Rates: Higher rates discourage
borrowing and spending.
• - Consumer Expectations: Future income
expectations affect spending.
• - Government Policies: Taxes and subsidies
influence consumption.

7. Types of Consumption
• - Autonomous Consumption: Spending
independent of income.
• - Induced Consumption: Spending that varies
with income.

8. Short-Run vs. Long-Run
Consumption
• - Short-run: More income leads to higher
consumption but not at the same rate.
• - Long-run: Factors like wealth accumulation
and credit availability influence patterns.

9. Role in Economic Policies
• - Impact on Aggregate Demand: Consumption
is a major component of GDP.
• - Multiplier Effect: Increased consumption
leads to higher economic growth.
• - Government Interventions: Stimulus
packages, tax cuts, and interest rate
adjustments.

10. Real-World Applications & Case
Studies
• - Great Depression & Keynesian Economics:
Government spending and consumption.
• - COVID-19 Pandemic: Changes in
consumption patterns due to uncertainty.
• - Current Economic Trends: Inflation, interest
rates, and consumer behavior.

11. Conclusion
• - Summary of key points.
• - Importance of the consumption function in
economic behavior.
• - Future trends in consumer spending.

12. References & Further Reading
• Microeconomics Economics book of H.R
Varian
• Advanced Microeconomics theory of Jehle &
Reney
• Basic Microeconomics of Mankiew