CONSUMPTION FUNCTION

AGGREGATE EXPENDITURE
The sum of personal consumption expenditure,
investment expenditure, government expenditure,
and net export expenditure in a given period of time.

E = C + I + G + (X M)

2
 PERSONAL CONSUMPTION EXPENDITURE
The amount of spending by households on
durable goods, nondurable goods, and services in
a given period of time.

Factor:

3
 CONSUMPTION FUNCTION
The fundamental relationship in
macroeconomics that assumes that
household consumption spending depends
primarily on the level of disposable income
(net of taxes) in the economy, all other
variables held constant.
C = f(Yd),
where
Yd = disposable, or after-tax income

4
MARGINAL PROPENSITY TO CONSUME (MPC)
The additional consumption spending generated by an
additional amount of real income, assumed to take a value less
than 1.

It was introduced by British economist John Maynard Keynes

C = Co + cY
Co = Autonomous Consumption
c= MPC

MPC = C/Yd or C/(Y - TP)

is between zero and one (0<c<1)

5
THE AVERAGE PROPENSITY TO CONSUME:
The average propensity to consume may be
defined as the ratio of consumption expenditure
to any particular level of income.
Average propensity to consume (APC = C/Y) falls
as income rises
THE KEYNESIAN CONSUMPTION
FUNCTION

C C cY

c c = MPC
= slope of the
1
consumption
C function

Y
 CALCULATE AVERAGE PROPENSITY TO
CONSUME (APC),
MARGINAL PROPENSITIES TO CONSUME (MPC)
AND
AUTONOMOUS CONSUMPTION
Income Consum APC Change in C Change in Y MPC= ch in Autonom
(Yd) ption C/ch in Y ous
(C) Consump
tion
0 30
100 100
200 170
300 240
400 310
CALCULATE AVERAGE PROPENSITY TO CONSUME (APC)
AND MARGINAL PROPENSITIES TO CONSUME (MPC)
Income Consum APC Change in C Change in Y MPC= ch in Autonom
(Yd) ption C/ch in Y ous
(C) Consump
tion
0 30 0
30
100 100 1 70 100 0.7
99.3
200 170 0.85 70 100 0.7
169.3
300 240 0.8 70 100 0.7
239.3
400 310 0.775 70 100 0.7
309.3