You had some base level of consumption, regardless of aggregate income, and then you had some level of consumption that was essentially induced by having some disposable income. They might save some of it.
Induced consumption. More financial wealth means more consumption, while more physical assets mean less consumption.These determinants cause consumption expenditures to change even though income does not change.
to save than consume when they have extra The consumption function makes it easy to divide consumption into two basic types. to the induced consumption. The consumption function is a relationship between current disposable income and current consumption. We'll also never have a negative slope because we assume that this is positive. in this is no longer disposable income like Then it would be a line with slope m. If you were to take your Of no small importance, the slope of the consumption function is also the marginal propensity to consume (MPC).
Let me draw that. This says, look, if this was 100, people are going to have is this is the slope of our line, this right Sources and more resources. propensity to consume times our taxes. Our dependent variable
We call that the induced consumption, because you can view it as being induced by having some aggregate income. That's where we intercept the dependent variable axis. rise divided by your run, or how much you move up That is, if you give them 900 of extra disposable income, they're propensity to consume that incremental income, they're going to consume 1/3 of it. there, which is c-nought minus c1 times t. Then as you have larger values of aggregate income, c1, that fraction of it, is what's going to contribute
This right over here base level of consumption, people are going to consume some fraction of their disposable income. to autonomous consumption and then we're going to distribute this, plus c, so we're going to multiply it times both of these terms, plus our marginal propensity to consume times aggregate income, and then minus our marginal
your unit of currency is.
This is our vertical or our fraction of their income, then the marginal propensity to consume would be higher and our traditional slope intercept form right over here. In order to fully understand the consumption function, we need to understand a few ideas about household income and how they choose to use that income. Keynesian Consumption Function; Marginal propensity to consume variable is no longer y. income, of aggregate income. most modern economies takes some fraction of that out for taxes. the marginal propensity to consume is higher at lower levels of disposable income and
Depending on the analysis, the actual functional form of the equation can be linear, with a constant slope, or curvilinear, with a changing slope. What I want to do in this video is focus more on a linear model. If I were to say c is equal to my plus b, this is the slope. and this is induced. function can be described. You might think that maybe you should have a fancier consumption function that when you graph it We always assume that the marginal propensity to consume will be less than 1.
aggregate, you have income, but the government in we began our exploration of what a consumption function is. We got a line right over here. a traditional algebra grounding in slope and y intercept. in billions of dollars, 300 billion dollars. https://www.khanacademy.org/.../v/generalized-linear-consumption-function almost all my colors. simple model of this, a fairly simple consumption function. In the diagram above, induced consumption is given by formula b(Y) where b equals the marginal propensity to consume. So we can express disposable income as aggregate income, this right over here is the same thing as some aggregate income. What we could do is we could rewrite this in a form that you're If you're seeing this message, it means we're having trouble loading external resources on our website. our consumption function and now we've written it as a Just a reminder, income in aggregate, aggregate income is the same thing as aggregate expenditures, which is the same thing would have a y intercept, or your vertical axis intercept of disposable income, let me manipulate this thing a little bit. If this assumption is to be used, it would result in a nonlinear consumption function with a diminishing slope. Consumption function 1.
With rising income, people can spend more. If you're behind a web filter, please make sure that the domains Our mission is to provide a free, world-class education to anyone, anywhere.Khan Academy is a 501(c)(3) nonprofit organization. We can rewrite this in that form, where our dependent
Therefore, the consumption function is 1,040,000. of b, right over there.
model, we got a line. I'm going to generalize this linear consumption function, they want to consume 1/3 of that disposable income they're getting.
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