The paper "Economics: Principles & Applications" is a great example of ana assignment on macro and microeconomics. The consumption function is a function that shows the relationship between income and consumer expenditure. In this function, consumer expenditure is assumed to be directly proportional to disposable income, that is, an increase in disposable income results in an increase in consumer spending. Therefore, the consumer function expresses the level of consumer spending and has three determinants, which are: Disposable income (Yd)Autonomous consumption (a)Marginal propensity to consume (c)Disposable income refers to the amount of money a person has to spend after the deduction of income tax.
Autonomous consumption on the other hand refers to the consumption level that does not rely on income. It is what a person consumes when he or she earns zero income. It is believed that even with no income a person has to survive either through borrowing or running down savings. The marginal propensity to consume is the change in consumer expenditure brought about by a change in disposable income (Hall, & Lieberman, 2009). Mathematically, the marginal propensity to consume is expressed as a derivative of consumption function with respect to disposable income that is, DC/dY.
By incorporating all the three determinants, the standard consumption function is written asC = a+c (Yd)Therefore, the consumption function is a positive line graph that slopes upwards. The diagram below shows a simplified consumption function. The consumption model is basically determined by the level of disposable income. As shown in the above diagram, the higher the disposable income the higher the consumer spending. According to this model, an increase in income results in an increase in consumer spending.
However, the rate at which consumer spending increases is lower than that of income. It is believed that at low income, consumers will spend a huge amount of their income. The average propensity to consume in this case can be either one or greater than one. This implies that consumers spend their entire income. People with low incomes do not have the luxury of saving. They normally spend their entire income on essentials. However, when income increases, people are always able to enjoy the luxury of saving a huge amount of their income.
Therefore, as income increases consumer spending increases. However, the increase in consumer spending will be at a lower rate than disposable income. Individuals earning high incomes have a lower average propensity to spend.
Hall, R. E., & Lieberman, M., 2009, Economics: Principles & Applications. Cengage Learning
Luo, Y., 2012, Aggregate Expenditure and Output in the Short Run.
Sexton, L., R., 2012, Exploring Macroeconomics. Cengage Learning.
Tucker, B., I, 2010, Macroeconomics for Today. Cengage Learning.