Consumption Function
The economic relationship between total consumer spending and disposable income.
What is Consumption Function?
The consumption function is an economic formula that describes the relationship between aggregate consumer spending and disposable income. In the Keynesian model, introduced by John Maynard Keynes, the consumption function is expressed as C = a + bY, where C is total consumption, a is autonomous consumption (spending independent of income, such as necessities financed by savings or credit), b is the marginal propensity to consume (MPC — the fraction of each additional dollar of income spent), and Y is disposable income. The MPC is central to fiscal policy analysis because it determines the size of the multiplier effect: the higher the MPC, the larger the boost to GDP from government spending or tax cuts.
Example
If the U.S. marginal propensity to consume is 0.8, each additional dollar of disposable income generates $0.80 in consumer spending. A $1,000 stimulus check therefore creates $1,000 / (1 - 0.8) = $5,000 in total economic activity through the multiplier — the initial recipient spends $800, the recipient of that spending spends $640, and so on, multiplying the original injection through the economy.