The bulk of consumption expenditures fall in the induced category because people are prone to base their spending on available income. However, some spending takes place independent of income. Autonomous consumption generally surfaces primarily as a theoretical extreme, at least for the aggregate household sector--the amount of consumption expenditures undertaken in the unlikely event that household sector income is zero

However, it does have a pragmatic interpretation, especially for individuals. A typical consumer such as Pollyanna Pumpernickel is bound to base personal consumption spending on available income. However, should Pollyanna's income fall to zero (perhaps due to a temporary bout of unemployment), then her spending is bound to fall, but not completely to zero. Her spending is likely to continue as she purchases necessities such as food, living space, energy, etc. And because these expenditures cannot be financed with current income, she is likely to rely on savings (accumulations of past income) or loans (paid off with future income). This is Pollyanna's autonomous consumption.

Autonomous In An Equation

C

=

a

+

bY

The two key parameters that characterize the consumption function are slope and intercept. Autonomous consumption is indicated by the intercept of the consumption function. Induced consumption is indicated by the slope.

• An Autonomous 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.


• An Induced 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).

Autonomous In A Line

Consumption Line

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

The two primary characteristics of the consumption function--slope and intercept--are also identified by the consumption line.

• An Autonomous Intercept: The consumption line intersects the vertical axis at a positive value of $1 trillion. Click the [Intercept] button to highlight. Once again this intercept value is autonomous consumption.


• An Induced 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. And once again this is induced consumption and the marginal propensity to consume (MPC).

Consumption Expenditures Determinants

These determinants, similar to those for other relations in the study of economics, cause a change in the underlying consumption-income relation. From a graphical perspective, these determinants cause the consumption line to shift, which effectively means that the intercept of this line changes.

More generally, these determinants cause a change in autonomous consumption. A decrease in interest rates, a boost in consumer confidence, or an increase in financial wealth, for example, all trigger an increase in consumption expenditures... even though income remains unchanged.

Other Autonomous Expenditures

• Autonomous investment is key factor in the analysis of business-cycle instability. Business cycle ups and downs can often be traced back to autonomous changes in investment expenditures by the business sector. While these autonomous expenditures are unrelated to income, they are influenced by other factors, such as interest rates, technology, expectations, and wealth.


• Although some degree of government purchases are induced by income, the government sector is also inclined to change spending in response to factors other than income. Autonomous government purchases result from these other influences and are perhaps most important in the analysis of fiscal policy designed to correct business cycle ups and downs.


• Autonomous net exports, the difference between exports and imports, are based on global economic conditions, especially economic activity in other countries. These expenditures by the foreign sector also depend on such things as currency exchange rates, trade agreements, wars and conflicts, or global politics.