Consumption Function

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DEFINITION of 'Consumption Function'

The consumption function is a mathematical formula laid out by famed economist John Maynard Keynes. The formula was designed to show the relationship between real disposable income and consumer spending, the latter variable being what Keynes considered the most important determinant of short-term demand in an economy.

The consumption function is represented as:

Consumption Function



Where:
C = Consumer spending
A = Autonomous consumption, or the level of consumption that would still exist even if income was $0
M = Marginal propensity to consume, which is the ratio of consumption changes to income changes
D = Real disposable income

BREAKING DOWN 'Consumption Function'

The consumption function is shown here to be linear, but that is dependent on the variable "M" (marginal propensity to consume) staying the same. In fact, consumers tend to spend a smaller percentage of their disposable income as it rises, creating a curved effect at higher income levels.

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