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ABSOLUTE POVERTY: The amount of income a person or family needs to purchase an absolute amount of the basic necessities of life. These basic necessities are identified in terms of calories of food, BTUs of energy, square feet of living space, etc. The problem with the absolute poverty level is that there really are no absolutes when in comes to consuming goods. You can consume a given poverty level of calories eating relatively expensive steak, relatively inexpensive pasta, or garbage from a restaurant dumpster. The income needed to acquire each of these calorie "minimums" vary greatly. That's why some prefer relative poverty.

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DERIVATION, CONSUMPTION LINE:

A consumption line, a graphical depiction of the relation between household sector consumption and income, can be derived from a simple consumption schedule, a table or chart showing the relation between household sector consumption and income. This is easily accomplished by plotting the consumption-income pairs from the schedule as points in a diagram that measures consumption on the vertical axis and income on the horizontal axis, then connection the points with a line. The consumption line can also be derived directly by plotting the consumption function using slope and intercept values.
The consumption line, also termed propensity-to-consume line or consumption function, can be derived by plotting the consumption-income combinations from a consumption schedule into a graph. It can also be derived by plotting the mathematical specification of a consumption function using slope and intercept.

Consumption Schedule
Consumption Schedule
 
Consumption Line
Consumption Line

First up is the consumption schedule. A representative consumption schedule is presented in the upper panel of the exhibit to the right. The two columns in the table measure income and consumption in trillions of dollars.

The first column of this table presents total income of the household sector. These values conveniently range from $0 to $10 trillion. The second column then presents the amount of this income the household sector uses for consumption expenditures. These values range from $1 trillion to $8.5 trillion.

The derivation of the consumption line involves plotting the consumption-income pairs in the schedule into a diagram, such as the space presented in the bottom panel of the exhibit.

This currently blank space measures consumption on the vertical axis and income on the horizontal axis. The consumption-income pairs from the top panel can be plotted in the bottom panel by clicking the [Consumption Line] button.

Once all points are plotted, the result is the red consumption line labeled C. The two features of the consumption line are slope and intercept.

  • Slope: The slope is positive, but less than one. In fact, the slope of the consumption line is numerically equal to the marginal propensity to consume (MPC). In this case the slope is equal to 0.75. The positive slope reflects induced consumption expenditures--more income means more consumption. Click the [Slope] button to illustrate.

  • Intercept: The consumption line intersects the vertical axis at a value of $1 trillion. This intersection point is autonomous consumption--consumption expenditures unrelated to income. Click the [Intercept] button to illustrate.
The consumption line can also be plotted directly using the consumption function. The two key bits of information needed for this task are the intercept and the slope. The following linear consumption function can be used to illustrate.
C=a+bY
where: C is consumption expenditures, Y is income (national or disposable), a is the intercept, and b is the slope.

The consumption line can be constructed by simply drawing a line with slope b that emerges for the vertical axis at intercept a.

<= DERIVATION, AGGREGATE EXPENDITURES LINEDERIVATION, PRODUCTION POSSIBILITIES CURVE =>


Recommended Citation:

DERIVATION, CONSUMPTION LINE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: February 17, 2019].


Check Out These Related Terms...

     | consumption schedule | consumption line | consumption function | induced consumption | autonomous consumption | average propensity to consume | marginal propensity to consume | saving line | derivation, saving line | slope, consumption line | intercept, consumption line | effective demand | psychological law |


Or For A Little Background...

     | consumption | consumption expenditures | Keynesian economics | macroeconomics | household sector | disposable income | national income |


And For Further Study...

     | personal consumption expenditures | induced expenditures | autonomous expenditures | aggregate expenditures | derivation, aggregate expenditures line | aggregate expenditures line | consumption expenditures determinants | Keynesian model | Keynesian equilibrium | injections-leakages model | aggregate demand | paradox of thrift | fiscal policy | multiplier |


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