Consumption Function

AAA

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

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Marginal Propensity To Consume ...

    A component of Keynesian theory, MPC represents the proportion ...
  2. Capital Saturation

    An economic state in which real income is high and is expected ...
  3. Life-Cycle Hypothesis (LCH)

    The Life-Cycle Hypothesis (LCH) is an economic theory that pertains ...
  4. Consumption Smoothing

    The ways in which people try to optimize their lifetime standard ...
  5. Consumer Spending

    The amount of money spent by households in an economy. The spending ...
  6. Personal Consumption Expenditures ...

    A measure of price changes in consumer goods and services. Personal ...
Related Articles
  1. thinkstock|istock
    Economics

    Understanding Supply-Side Economics

    Does the amount of goods and services produced set the pace for economic growth? Here are the arguments.
  2. Investing

    What's the difference between macroeconomics and microeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and government decisions. Macroeconomics and microeconomics, and their wide ...
  3. There are many ways to rank the word's most powerful companies. Looking at market value, brand value or sales revenue are all methods used to rank the biggest companies in the world.
    Economics

    Most Powerful And Influential Public Companies In 3 Metrics

    There are many ways to rank the word's most powerful companies. Looking at market value, brand value or sales revenue are all methods used to rank the biggest companies in the world.
  4. A look at China's plan to control population growth and how it could change going forward.
    Economics

    China's One-Child Policy Explained

    A look at China's plan to control population growth and how it could change going forward.
  5. With the second-largest economy in the world, China has significant (and growing) influence on the global economy. But how is that impact figured?
    Economics

    A Look At China's Growing Influence On The World

    With the second-largest economy in the world, China has significant (and growing) influence on the global economy. But how is that impact figured?
  6. If you're considering investing in China and want to know when to buy, sell, hold or stay away, consider these economic indicators.
    Economics

    Eyeing China? Consider These Economic Indicators

    If you're considering investing in China and want to know when to buy, sell, hold or stay away, consider these economic indicators.
  7. Economics

    How A Limited Government Affects A Country's Finances

    Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result?
  8. Far from stagnant growth, crushing inflation or political instability, these Latin American nations deserve consideration for your investment dollars.
    Economics

    The Best 4 Places To Invest In Latin America

    Far from stagnant growth, crushing inflation or political instability, these Latin American nations deserve consideration for your investment dollars.
  9. Macroeconomics studies the performance of an economy as a whole.
    Economics

    Macroeconomics

    Macroeconomics studies the performance of an economy as a whole. While microeconomics focuses on the decisions, spending and performance of individuals or single businesses, macroeconomics focuses ...
  10. Venezuela has more oil than anyone, and Brazil and Argentina have lots going for them, too, so why can't they get out of their own way economically?
    Economics

    Where NOT To Invest in Latin America

    Venezuela has more oil than anyone, and Brazil and Argentina have lots going for them, too, so why can't they get out of their own way economically?

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center