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ADJUSTMENT, LONG-RUN AGGREGATE MARKET: Disequilibrium in the long-run aggregate market induces changes in the price level that restore equilibrium. If the price level is above the long-run equilibrium price level, economy-wide product market surpluses cause the price level to fall. If the price level is below the long-run equilibrium price level, economy-wide product market shortages cause the price level to rise. In both cases long-run equilibrium is restored. Price level changes induce changes in aggregate expenditures but NOT changes in real production. The reason is that long-run aggregate supply is full-employment real production, which is unaffected by the price level.

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SLOPE, CONSUMPTION LINE:

The positive slope of the consumption line is also termed the marginal propensity to consume (MPC). This slope is greater than zero but less than one, reflecting induced consumption and the Keynesian psychological law of consumer behavior that consumption increases by less than the increase in income. The slope of the consumption line provides the foundation for the slope of the aggregate expenditures line and thus also affects the magnitude of the multiplier process.
Consumption Line
Consumption Line
The consumption line, also termed propensity-to-consume line or consumption function, shows the relation between consumption expenditures and income for the household sector. The income measure commonly used is national income or disposable income. Occasionally a measure of aggregate production, such as gross domestic product, is used instead.

A representative consumption line is presented in the exhibit to the right. This red line, labeled C in the exhibit, is positively sloped, indicating that greater levels of income generate greater consumption expenditures by the household sector. This positive relation corresponds to the fundamental psychological law of Keynesian economics.

The consumption line graphically illustrates the consumption-income relation for the household sector, which is the foundation of the aggregate expenditures line used in Keynesian economics to identify equilibrium income and production. 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 slope of the consumption line presented here is positive, but less than one. In fact, the slope of the consumption line is numerically equal to the marginal propensity to consume. In this case the slope is equal to 0.75. The positive slope reflects induced consumption expenditures--more income means more consumption. It also reflects the basic Keynesian psychological law. Click the [Slope] button to illustrate.

To illustrate the equality between slope and the marginal propensity to consume, consider the equations for each. The slope of the consumption line is specified as the "rise" over the "run." The rise is the change in consumption measured on the vertical axis and the run is the change in income measured on the horizontal axis.

slope=rise
run
=change in consumption
change in income
The marginal propensity to consume (MPC) is the incremental change in consumption resulting from an incremental change in income.
MPC=change in consumption
change in income
The slope of the consumption line is the marginal propensity to consume, they are one and the same.

The positive slope of the consumption line reflects induced consumption, which is consumption that depends on the level of household sector income. If the household sector receives more income, then it is induced to undertake additional consumption expenditures. Of course, a drop in income induces the household sector to reduce expenditures.

<= SLOPE, AGGREGATE EXPENDITURES LINESLOPE, GOVERNMENT PURCHASES LINE =>


Recommended Citation:

SLOPE, CONSUMPTION LINE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: March 28, 2024].


Check Out These Related Terms...

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


Or For A Little Background...

     | consumption | consumption expenditures | Keynesian economics | macroeconomics | household sector | disposable income | national income | gross domestic product | saving |


And For Further Study...

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


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