EC140 Lecture Notes - Lecture 4: Autonomous Consumption, Consumption Function
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People buy consumption goods from disposable income, yd. All disposable income spent on consumption or savings. Consumption is divided into autonomous and induced components (cid:1829)=(cid:1827)+(cid:1828) (cid:1829)=3(cid:882)+(cid:882). 8. Wide variety of factors can shift the consumption function: changes in household wealth, changes in interest rates, expectation about the future. Shifts vs. rotation: shift in autonomous consumption, change in marginal propensity to consume. For the simplest possible model-assume desired investment is autonomous expenditure. Autonomous does not mean constant: low interest rates or business optimism will increase residential and plant/equipment investment. Or simplifying into autonomous and induced expenditures. Given our modelling of c and i: (cid:1827)=(cid:1827)+(cid:1828) +0 (cid:1827)=(cid:4666)(cid:1827)+0(cid:4667)+(cid:1828) . Equilibrium occurs when choices are mutually consistent. If ae>y, inventories would be falling, firms would increase output, and therefore income would rise. If ae
