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In economics, the consumption function, or better, the consumption expenditure

function, is a one mathematical function used to express consumer spending.


According to economic science historians' books, it was first mentioned by John
Maynard Keynes who introduced it in his most famous book The General Theory of
Employment, Interest, and Money. The function is used to calculate the amount of
total consumption in an economy. Due to the lack of mathematical tools when it was
first drafted, Keynes presented a simplistic formulation, today fairly overcome (see
last paragraph). It was made up of autonomous consumption that is not influenced
by current income and induced consumption that is influenced by the economy's
income level. This function could be written in a variety of ways, the most simplistic
being .

A refined version of the initial consumption function is shown as the affine function:
where

C = total consumption,
c0 = autonomous consumption (c0 > 0),
c1 is the marginal propensity to consume (ie the induced consumption) (0 < c1 <
1), and
Yd = disposable income (income after government intervention benefits, taxes
and transfer payments or Y + (G T)).
Autonomous consumption represents consumption when income is zero. In
estimation, this is usually assumed to be positive. The marginal propensity to
consume (MPC), on the other hand measures the rate at which consumption is
changing when income is changing. In a geometric fashion, the MPC is actually the
slope of the consumption function.

The MPC is assumed to be positive. Thus, as income increases, consumption


increases. However, Keynes mentioned that the increases (for income and
consumption) are not equal. According to him, "as income increases, consumption
increases but not by as much as the increase in income".

The Keynesian consumption function is also known as the absolute income


hypothesis, as it only bases consumption on current income and ignores potential
future income (or lack of)

In economics, the marginal propensity to consume (MPC) is a metric that quantifies


induced consumption, the concept that the increase in personal consumer spending
(consumption) occurs with an increase in disposable income (income after taxes and
transfers). The proportion of disposable income which individuals spend on
consumption is known as propensity to consume. MPC is the proportion of additional
income that an individual consumes. For example, if a household earns one extra
dollar of disposable income, and the marginal propensity to consume is 0.65, then
of that dollar, the household will spend 65 cents and save 35 cents. Obviously, the
household cannot spend more than the extra dollar (without borrowing).

According to John Maynard Keynes, marginal propensity to consume is less than one

Autonomous consumption (also exogenous consumption) is consumption


expenditure that occurs when income levels are zero. Such consumption is
considered autonomous of income only when expenditure on these consumables
does not vary with changes in income; generally, it may be required to fund
necessities and debt obligations. If income levels are actually zero, this
consumption counts as dissaving, because it is financed by borrowing or using up
savings. Autonomous consumption contrasts with induced consumption, in that it
does not systematically fluctuate with income, whereas induced consumption does.
[1] The two are related, for all households, through the consumption function:

where

C = total consumption,
c0 = autonomous consumption (c0 > 0),
c1 = the marginal propensity to consume (the gradient of induced consumption) (0
< c1 < 1), and
Yd = disposable income (income after government taxes, benefits, and transfer
payments).
Induced consumption is household consumption that varies with income. When a
change in income "induces" a change in consumption on goods and services, then

that changed consumption is called induced consumption. In contrast, expenditures


for autonomous consumption do not vary with income.

For instance, expenditure on a consumable that is considered a normal good would


be considered to be induced.

In economics, the life-cycle hypothesis (LCH) is a model trying to explain individual's


consumption patterns. The life-cycle hypothesis implies that individuals plan their
consumption and savings behaviour over their life-cycle. They intend to even out
their consumption in the best possible manner over their entire lifetimes, doing so
by accumulating when they earn and dis-saving when they are retired. The key
assumption is that all individuals choose to maintain stable lifestyles. This implies
that they usually don't save up a lot in one period to spend furiously in the next
period, but keep their consumption levels approximately the same in every period.
The first period should be ignored otherwise housing depreciates below its marginal
rate of substitution

the permanent income hypothesis (PIH) is an economic theory attempting to


describe how agents spread consumption over their lifetimes. First developed by
Milton Friedman,[1] it supposes that a person's consumption at a point in time is
determined not just by their current income but also by their expected income in
future years- their "permanent income". In its simplest form, the hypothesis states
that changes in permanent income, rather than changes in temporary income, are
what drive the changes in a consumer's consumption patterns. Its predictions of
consumption smoothing, where people spread out transitory changes in income
over time, departs from the traditional Keynesian emphasis on the marginal
propensity to consume. It has had a profound effect on the study of consumer
behavior, and provides an explanation for some of the failures of Keynesian demand
management techniques.[2]

Income consists of a permanent (anticipated and planned) component and a


transitory (windfall gain/unexpected) component. In the permanent income
hypothesis model, the key determinant of consumption is an individual's lifetime

income, not his current income. Permanent income is defined as expected long-term
average income.

Assuming consumers experience diminishing marginal utility, they will want to


smooth out consumption over time, e.g. take on debt as a student and also ensure
savings for retirement. Coupled with the idea of average lifetime income, the
consumption smoothing element of the PIH predicts that transitory changes in
income will have only a small effect on consumption. Only longer lasting changes in
income will have a large effect on spending.

A consumer's permanent income is determined by their assets; both physical


(shares, bonds, property) and human (education and experience). These influence
the consumer's ability to earn income. The consumer can then make an estimation
of anticipated lifetime income. A worker saves only if they expect that their longterm average income, i.e. their permanent income, will be less than their current
income.