Beruflich Dokumente
Kultur Dokumente
C = consumption expenditure
Y = disposable income
C = autonomous consumption (intercept of the line)
c = marginal propensity to consume (slope of the line)
C = C + cY
Constant APC
c
C
Disposable income
Empirical Evidence
High income families have a higher marginal propensity to
save (MPS = 1 MPC)
High income families have a higher average propensity to
save (APS = 1 APC); APC falls with the level of income
In the long-run, autonomous consumption falls to zero
(C = 0)
C = Y
Variable APC;
=0
Disposable income
Y2
C2
C1
Y1
C1
C
Current Period
Consumer Preferences
Consumer preferences are shown by a family of
indifference curves
Any combination of current and future consumption along
an indifference curve provides the same level of
satisfaction for the consumer
A higher indifference curve yields combinations with
greater satisfaction
Consumer Preferences
Future Period
Combination B is preferred to
combination A because it yields
more in both periods
B
A
Current Period
B
A
C1c
C2c
Current Period
Consumption Function
C = (W + RY)/T = (1/T)W + (R/T)Y
Define:
= 1/T is the MPC out of wealth
= R/T is the MPC out of income
C = W + Y
Consumption Function
Consumption expenditure
C = W + Y
W
Disposable income
For the United States, = 0.02 and = 0.60.
Consumption Function
Consumption expenditure
W2
W1
Disposable income
Increased wealth shifts the consumption function upward.
Dissaving
Years
Consumption Function
Consumption is a function of permanent income
C = YP
Consumers use saving and borrowing to smooth
consumption in response to transitory changes in
income
Determinants of Consumption
Combining all the theories, we can conclude that
consumption depends on
Current income
Expected future income
Wealth
Interest rate