The Consumption Function Essay Example for Free

The Consumption Function EssayTo make the income-expenditure model more realistic, we will need to introduce other components of demand, including the government and the foreign sector. only if first we need to recognize that consumers planned expenditures will depend on their level of income.Consumer Spending and Income The ingestion function describes the relationship between desired disbursement by consumers and the level of income. When consumers have more income, they will want to purchase more goods and services. A simple usance function give the gate be exposit by the equationC = Ca + byIn which essential outgo spending, C, has two parts. The first part, Ca, is called autonomous consumption, and it does not directly depend on the level of income. The second part, by, represents the part of consumption that does depend on income. It is the product of the fraction b, called the marginal propensity to consume (MPC), and level of income in the economy, y. The MPC, whi ch has a esteem of b in our formula, tells us how much consumption spending will increase for every dollar that income increases. If b equals 0.7, then for every $1 that income increases, consumption would increase by 0.7 $1, or $0.70. As firms produce yield, they pay households income in the form of wages, interest, profits, and rents. We can therefore use y to represent both output and income.Changes in the Consumption Function The consumption function is determined by the level of autonomous consumption and by the MPC. The level of autonomous consumption can change, and so can the MPC. Changes in either shift the consumption function to another position on the graph. A higher level of autonomous consumption but no change in MPC will shift the entire consumption function upward and parallel to its original position. More consumption occurs at every level of income. A number of factors can let autonomous consumption to change. Here are twoIncreases in consumer wealth will cause an increase in autonomous consumption. Wealth consists of the value of stocks, bonds, and consumer durables (consumer goods that last a long time, such as automobiles and refrigerators). Note that a persons wealth is not the same as income. Income is the amount of money someone earns during a period, such as in a given year, whereas wealth represents the persons total net worth.Increases in consumer confidence will increase autonomous consumption ratio. Forecasters pay attention to consumer confidence, a measure based on household surveys of how overbearing consumers are feeling about the future, because it helps them to predict consumption spending. The Conference Board, a nonprofit organization devoted to disseminating economic analysis, publishes an index of consumer confidence each calendar month that many forecasters rely on. A change in the marginal propensity to consume will cause a change in the slope of the consumption function.