What Is a Consumption Function?
The consumption function is an expression of the relationship between consumption and income. It was first proposed by J. Keynes in 1936, "The General Theory of Employment, Interest, and Money", that is, there is a fairly stable relationship between disposable income and consumption. This relationship can be expressed as a function called Consumption function. Keynes believes that the factors affecting people's consumption can be divided into two categories: subjective factors; objective factors. Subjective factors include the psychological characteristics of human nature, social customs and social systems, and the latter two will not change significantly in a short period of time. Objective factors include changes in interest rates and fiscal policies, which will not change much in the short term. Therefore, Keynes concluded that the consumption function is a relatively stable function. Its shape depends on the total income and the basic psychological laws of the person. The basic psychological principles of human nature determine that: when income increases, people will increase consumption, but the increase in consumption is not as rapid as the increase in income. This is the law of diminishing marginal consumption tendency. Therefore, it can be roughly imagined that Keynes's consumption function graph is that in an economic cycle, consumption and income and employment have the same increase and decrease relationship, but its fluctuation is smaller than the latter two. [1]
Consumption function
- Consumption function refers to reflecting consumption
- The ratio of consumer spending to income at any income level. Abbreviation: APC. APC = C / Y
- Marginal consumption propensity MPC
Consumption function definition
- Refers to the ratio of the increased unit of income used to increase consumption. Consumption increase
- Consumption function
Consumption function characteristics
- Marginal consumption propensity is the slope of any point on the consumption curve; 0 <MPC <1; As income increases, MPC decreases.
- The concept of the consumption function was first proposed by British economist JM Keynes. In his book The General Theory of Employment, Interest, and Money (1936), he proposed that total consumption is a function of total income. This idea is expressed as a linear function as:
- MPC = c / y = dc / dy
- Where C is the total consumption, Y is the total income, and the subscript t is the period; a and b are parameters. The parameter b is called the marginal propensity to consume and its value is between 0 and 1. And there is always this consumption function of APC> MPC Keynes only uses income to explain consumption, which is called the absolute income hypothesis. This hypothesis is too simple and rough, and the error is large when used for prediction.
- After the Second World War, Western economists conducted in-depth research on the consumption function, and proposed several new hypotheses and corresponding functional formulas. The function form is relatively simple and the content is generally in line with the actual consumption function:
- C t = a + Y t + C t 1
- In the formula, C t represents consumption in period t, Y t represents income in period t, and C t-1 represents consumption in the previous period (t-1 period); , , and are parameters. The last term of this consumption function can be explained by the inertial effects of consumption and by the effects of lasting income. Because the recursion relationship can be used to rewrite the above consumption function as:
- This formula shows that consumption is a function of income over the past calendar years.
- The consumption function is mainly used in macroeconomic analysis. Macroeconomic models usually include consumption as one of their core equations. The academic and empirical studies of the consumption function in the Chinese academia since the 1980s have incorporated the consumption function into China's macroeconomic model.