Definition – What is the consumption function?
The consumption function is used to calculate the relationship between consumption and disposable income.
Formula – How to calculate the consumption function
Consumption = Autonomous Consumption + (Marginal Propensity to Consume x Real Disposable Income)
Autonomous Consumption is 400,000, MPC is 0.8, and real disposable income is 800,000.
Consumption Function = 400,000 + (0.8 x 800,000) = 400,000 + 640,000 = 1,040,000.
Therefore, the consumption function is 1,040,000.
Sources and more resources
- Wikipedia – Consumption Function – An overview of the consumption function.
- Khan Academy – Consumption function basics – A basic introduction to the consumption function. This video is part of a larger course on macroeconomics.
- Investopedia – Consumption Function – This page breaks down what the consumption function is. It includes a formula.