Consumption

Question 1

Define consumption

Answer 1

The expenditure on commodities by households to satisfy their immediate need and wants.

Question 2

What is the Keynesian consumption function?

Answer 2

C = a +bY.

It shows the positive relationship between income and consumption. As Y increases, so does consumption but at a lower rate.

a - the autonomous consumption. This consumption is independent from income, as when Y=0, this still needs to be spent. It is why the consumption function curve, starts from the y=axis.

b - the gradient of the curve - the MPC - the proportion of a change in income that households choose to spend - ∆C/∆Y.

Question 3

What does an increase in wealth cause to the consumption function?

Answer 3

A change in the wealth of the household will lead to a parallel shift in the consumption curve. Autonomous consumption increases, however the MPC remains the same.

If household wealth increases, assuming that income stays the same, if a household owns more assets, we would expect it to consumer more.
These assets are a stock concept, which can be in the form of property, vehicles and financial assets.

Question 4

Define the MPC.

Answer 4

The Marginal Propensity of Consume (MPC) is the proportion of change in disposable income that households choose to consume. It is calculated using = ∆C/∆Y.

A change in MPC will cause a pivotal shift in the consumption function.

Question 5

What factors cause the consumption function to shift?

Answer 5

1. Wealth
2. Expectations
3. Availability of Credit
4. Interest Rates
5. Inflation
6. Direct Taxes
7. Employment constrains
8. Demography
9. Distribution of income
10. Availability of Goods
11. Attitudes.