John Maynard Keynes derived the consumption function to show the relationship between consumer spending and disposable income. Consumer spending is part of Keynesian's economics model. The consumption function is more of a theoretical way to show how an economy will react under given circumstances than it is a practical function that works with real-world numbers. The formula for calculating this function is the marginal propensity to consume multiplied by real disposable income, plus autonomous consumption.
- Skill level:
Find the autonomous spending, the marginal propensity to consume and real disposable income. Autonomous spending is how much consuming would still exist if income was zero. The marginal propensity to consume is a portion of income spent instead of saved. Real disposable income is the amount of money a consumer has to spend after income taxes. For example, autonomous spending equals £195. The marginal propensity to consume is 0.7 and real disposable income is £260.
Multiply real disposable income by the marginal propensity to consume. In our example, 0.7 times £260 equals £182.
Add autonomous spending to Step 2. In our example, £182 plus £195 equals £377 of consumer spending.
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