This function is presented either as a mathematical equation, most often as a simple linear equation, or as the graphical consumption line. In either form, consumption is measured by consumption expenditures and income is measured as disposable income, national income, or occasionally gross domestic product.

The primary purpose of the consumption function the basic consumption-income relation for the household sector, which is the foundation of the aggregate expenditures line used in Keynesian economics.

The consumption function makes it easy to divide consumption into two basic types. Autonomous consumption is the intercept term. Induced consumption is the slope. Of no small importance, the slope of the consumption function is also the marginal propensity to consume (MPC).

First, The Equation

C

=

f(Y)

Depending on the analysis, the actual functional form of the equation can be linear, with a constant slope, or curvilinear, with a changing slope. The most common form is linear, such as the one presented here:

C

=

a

+

bY

The two key parameters that characterize the consumption function are slope and intercept.

• Slope: The slope of the consumption function (b) measures the change in consumption resulting from a change in income. If income changes by $1, then consumption changes by $b. This slope is generally assumed and empirically documented to be greater than zero, but less than one (0 < b < 1). It is conceptually identified as induced consumption and the marginal propensity to consume (MPC).


• Intercept: The intercept of the consumption function (a) measures the amount of consumption undertaken if income is zero. If income is zero, then consumption is $a. The intercept is generally assumed and empirically documented to be positive (0 < a). It is conceptually identified as autonomous consumption.

Then, The Graph

Consumption Line

C

=

1

+

0.75Y

For reference, a black 45-degree line is also presented in this exhibit. Because this line has a slope of one, it indicates the relative slope of the consumption line.

The two primary characteristics of the consumption function--slope and intercept--also can be identified with the consumption line.

• Slope: The slope of the consumption line presented here is positive, but less than one. In this case the slope is equal to 0.75. Click the [Slope] button to highlight.


• Intercept: The consumption line intersects the vertical axis at a positive value of $1 trillion. Click the [Intercept] button to highlight.

And Other Factors

C

=

f(Y, OF)

Consumer confidence is the general optimism or pessimism the household sector has about the state of the economy. More optimism means more consumption. Interest rates affect the cost of borrowing the funds used to purchase durable goods. Higher interest rates mean less consumption. Wealth is the financial and physical assets owned by the household sector. More financial wealth means more consumption, while more physical assets mean less consumption.