Consumption does not increase at the same rate as the income does. But increase consumption is less than increase in income. Consumption f (income) or C f (y) Consumption expenditure increases with increase in income.
Where 'a' is autonomous consumption (i.e., consumption expenditure independent of the income level and is there even when income level is zero), 'b' is the MPC or the fraction of income consumed and Y is the level of income. Consumption function can be defined as the relationship between consumption and income. Hence, equation for a straight line consumption function is So the formula would divide the new expenditure (500) by the. That represents a 500 change in consumer spending.
#CONSUMPTION FUNCTION FORMULA PLUS#
Now, the total consumption expenditure at any income level Y consists of expenditure at zero income level ‘a’ plus portion income consumed ‘bY’ at that level of income (Y). Now suppose you spend 500 of this new income. In mathematical language we denote this consumption expenditure at zero income level by the letter ‘a’. In the diagram the intercept OC shows the expenditure at zero income level. This expenditure at zero level of income is called autonomous consumption expenditure which is shown by the intercept made by the consumption curve on the Y-axis. Thus, even at zero level of income, some consumption expenditure is incurred. A person even with no income must consume something to keep himself alive. But as we are well aware, there is always certain minimum consumption expenditure that has to be incurred even when income level is zero. Thus, at an income level Y, the consumption expenditure will be bY. This constant fraction is nothing but the MPC which is denoted by the letter ‘b’. In a straight line consumption function, the slope of consumption curve is constant showing that a constant fraction of increased income is being consumed. Straight Line Consumption Function Equation
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