Consumption Function
1 Quick Explanation 1–3 min
Consumption function shows how consumption (C) depends on income (Y).
C = C̅ + bY — autonomous consumption plus a fraction of income.
2 Detailed Notes
Definition
Definition
The consumption function (propensity to consume) shows the functional relationship between consumption expenditure and disposable income. C = f(Y).
Formula
Key equation
C = C̅ + bYC̅ = autonomous consumption (consumption when Y = 0, still needed for survival, shown as intercept). b = MPC (slope, 0 < b < 1).
Formula
APC and MPC
APC = C ÷ Y
MPC = ΔC ÷ ΔY
APC + APS = 1
MPC + MPS = 1APC = average propensity to consume (share of income consumed). MPC = marginal propensity to consume (extra consumption per extra rupee of income).
Comparison
APC vs MPC
| Basis | APC | MPC |
|---|---|---|
| Meaning | Total C per unit of total Y | Change in C per unit change in Y |
| Formula | C/Y | ΔC/ΔY |
| Range | Can be > 1 at low income | Always between 0 and 1 |
| Falls as income rises | Yes | Roughly constant (linear) |
Key idea
Properties
- Even at zero income, consumption is positive (C̅ > 0) → dissaving.
- MPC lies between 0 and 1: 0 < MPC < 1.
- As income rises, APC falls and approaches MPC.
- MPC determines the slope of the consumption curve and the size of the multiplier.
In One Minute
C = C̅ + bY. APC = C/Y, MPC = ΔC/ΔY. APC + APS = 1, MPC + MPS = 1. MPC determines the multiplier.
Important for Exam
- ⭐ 1-mark: APC = C/Y.
- ⭐ Numerical: find consumption/saving given MPC & income.
- ⭐ Properties of consumption function (3 marks).
- ⭐ Diagram: consumption curve with C̅ intercept.
Watch & Learn
Watch on YouTubeConsumption function & Saving Function - with Derivation - AD- AS Part 7 Class 12 Macro economics.
by Sunil Panda-The Educator
Why watch? Equation + APC/MPC + diagram in one video.
Open on YouTube Watch on YouTubeConsumption function & Saving Function - with Derivation - AD- AS Part 7 Class 12 Macro economics.
by Sunil Panda-The Educator
Why watch? Good numerical practice on propensities.
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