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Keynesian Consumption Function Explained

The consumption function, based on Keynesian theory, illustrates the relationship between income and consumption, primarily indicating that consumption depends on current disposable income. Key insights include that as income rises, consumption increases but at a diminishing rate, leading to a decline in the average propensity to consume (APC) while the marginal propensity to consume (MPC) remains stable. The document also contrasts short-run and long-run consumption behaviors, highlighting the role of autonomous consumption.

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58 views13 pages

Keynesian Consumption Function Explained

The consumption function, based on Keynesian theory, illustrates the relationship between income and consumption, primarily indicating that consumption depends on current disposable income. Key insights include that as income rises, consumption increases but at a diminishing rate, leading to a decline in the average propensity to consume (APC) while the marginal propensity to consume (MPC) remains stable. The document also contrasts short-run and long-run consumption behaviors, highlighting the role of autonomous consumption.

Uploaded by

abdi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

The Consumption Function

(Keynesian Theory)
Full Lecture with Figures, Tables, and
Properties
Based on Keynesian Theory of Consumption
1. Introduction
• The consumption function explains the
relationship between income and
consumption. Keynes proposed that
consumption depends primarily on current
disposable income.

• General form: C = a + bYd, where a =


autonomous consumption and b = MPC.
2. Keynes’ Three Conjectures
• 11️⃣As income rises, consumption also rises but
less than proportionately (ΔC < ΔY).
• 2️⃣The ratio of consumption to income (APC)
decreases as income increases.
• 3️⃣Current consumption depends mainly on
current income, not future expectations.
3. Mathematical Expression
• C = a + bYd
• • a = Autonomous consumption (C when Y=0)
• • b = MPC = ΔC/ΔY
• • Yd = Disposable income

• This linear function implies that consumption


grows with income, but at a diminishing rate.
4. Figure 2.1 – MPC and APC
• MPC is the slope of the consumption function
(C = a + bYd).
• APC is measured by the slope of a line from the
origin to a point on the function.

• When autonomous consumption (a) > 0, MPC <


APC.
• As income increases (Y1→Y3), APC declines
while MPC remains constant.
5. Figure 2.2 – Proportional Consumption
Function
• If a = 0, the consumption function passes
through the origin (C = bYd).
• Here, consumption is proportional to income,
and MPC = APC.

• This represents long-run consumption


behavior where no dissaving occurs.
6. Figure 2.3 – Consumption and Saving
Functions
• C = a + bY
• S = -a + (1-b)Y

• At very low income, consumption > income →


dissaving.
• As income rises, saving becomes positive. The
functions are mirror images around the 45°
line.
7. Figure 2.4 – Short-run vs Long-run
Functions
• Short-run: C = a + bY (includes autonomous
consumption)
• Long-run: C = bY (starts at origin)

• In short-run, APC decreases as income rises.


• In long-run, APC stabilizes (Kuznets’ finding).
8. Example – MPC and APC
• Example:
• Income (Y): 0, 100, 200, 300
• Consumption (C): 50, 120, 190, 260

• MPC = (120–50)/(100–0) = 0.7


• APC = C/Y:
• Y=100 → 1.20
• Y=200 → 0.95
• Y=300 → 0.87

• → APC declines with income while MPC stays constant.


9. Properties of Keynesian Consumption
Function
1. C = a + bY → intercept a > 0 (autonomous
consumption)
2. MPC < 1 → consumption rises less than
income
• 3️⃣APC > MPC when a > 0
• 4️⃣APC falls as income rises
• 5️⃣Dissaving occurs at very low income levels
10. Conjectures vs Function Properties
• Conjectures (Behavioral) vs Properties (Analytical)

• • Conjecture 1 ↔ MPC < 1


• • Conjecture 2 ↔ APC declines with income
• • Conjecture 3 ↔ Consumption depends on
current income

• Thus, conjectures describe tendencies; properties


show mathematical implications.
11. Summary Diagrams
• Diagram 1: Keynes’ Conjectures (behavioral
laws)
• Diagram 2: Function Properties (mathematical
results)

• Together, they illustrate the short-run and


long-run patterns of consumption behavior.
12. Conclusion
• Key Insights:
• • Consumption rises with income, but less than
proportionally.
• • MPC remains stable; APC declines with
income.
• • Autonomous consumption explains why MPC
< APC.
• • In long-run, APC becomes constant
(proportional relationship).

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