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Created 3/10/1998
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The Consumption Function

J. Bradford DeLong
delong@econ.berkeley.edu
http://www.j-bradford-delong.net


A key tool in building up economists' standard model of the business cycle is the so-called consumption function: an algebraic relationship between national income and consumption spending that tells us what, for each possible level of national income, the level of consumption spending will be.

We build up the consumption function from two facts: (1) that there is a baseline level of consumption spending that would continue even if incomes were zero, and (2) that for each $1 increase in total incomes, consumption spending increases by a smaller amount--say $c'.

The parameter c' of the consumption function is called the marginal propensity to consume.

 


Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/

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