Mathematically explain consumption function
The consumption function is an economic theory that describes the relationship between household consumption and disposable income. It is typically expressed as an algebraic equation in the form of:
C = a + bY
where C is the level of consumption, a is the intercept (autonomous consumption), b is the marginal propensity to consume (MPC), and Y is disposable income.
The equation shows that consumption is determined by two components: autonomous consumption (a) and the change in consumption in response to a change in income (bY). The MPC, represented by b, indicates the proportion of additional income that is spent on consumption.
The consumption function suggests that as income increases, households will consume more, but not all of the increase in income will be spent on consumption. This is because individuals may choose to save some portion of their income or spend it on other goods and services. The consumption function helps economists understand how changes in income impact household spending behavior and overall economic activity.