ECON 20 Lecture Notes - Lecture 15: Consumption Function
Document Summary
C = a + (mpc) (y) where c = consumption a = constant. Mpc = marginal propensity to consume, a number between zero and one assumed to be constant. The constant a is literally the amount of consumption that would take place if income were zero. But we really don"t know what consumption would be if income were zero. In practice, a represents other factors affecting consumption besides income. An exogenous consumption shock will change a. for example an intense marketing campaign by automakers may cause consumption of cars to increase even though incomes have not changed. (1) movements along the consumption function with changes in disposable income. Holding all else constant, if disposable y changes, then you only move along the graph. (2) relation between slope of the consumption function and mpc. The algebraic consumption function describes a standard linear equation in slope- intercept form. The constant a is the intercept and the mpc is the slope.
