Consumption Function
What is Consumption Function?
The relationship between household spending and income.
Understanding Consumption Function
Keynes argued that consumption rises with income, but by less than the full increase. The simplest version is C = a + bY, where a is spending at zero income and b is the MPC.
Later theories, such as Milton Friedman's permanent income hypothesis and Franco Modigliani's life-cycle hypothesis, argued that people base spending on long-run expected income, not just this year's.