Understanding the Consumption Function: Explained in Simple Terms

🚡The consumption function represents the relationship between consumption and disposable income. It explains how households spend their income on goods and services.

📈Disposable income is the income that remains after deducting taxes and mandatory expenses. It includes government transfers that households can save or spend.

💰The marginal propensity to consume (MPC) refers to the proportion of disposable income that consumers spend on consumption rather than savings.

💱The marginal propensity to save (MPS) represents the change in savings that occurs in response to an incremental change in disposable income.

📋Consumer spending is influenced by factors such as income, the desire to save, and changes in disposable income. These factors determine the slope of the consumption function.

What is the consumption function?

—The consumption function explains how households spend their income on goods and services. It represents the relationship between consumption and disposable income.

What is disposable income?

—Disposable income is the income that remains after deducting taxes and mandatory expenses. It includes government transfers that households can save or spend.

What is the marginal propensity to consume (MPC)?

—The marginal propensity to consume (MPC) refers to the proportion of disposable income that consumers spend on consumption rather than savings.

What is the marginal propensity to save (MPS)?

—The marginal propensity to save (MPS) represents the change in savings that occurs in response to an incremental change in disposable income.

What factors influence consumer spending?

—Consumer spending is influenced by factors such as income, the desire to save, and changes in disposable income. These factors determine the slope of the consumption function.

00:05The consumption function is the relationship between consumption and disposable income. Consumption refers to the purchase of goods and services by households.

00:25Disposable income is the income that remains after deducting taxes and mandatory expenses, including government transfers.

01:02The marginal propensity to consume (MPC) is the proportion of disposable income that consumers spend on consumption rather than savings.

02:07The marginal propensity to save (MPS) represents the change in savings that occurs in response to an incremental change in disposable income.

02:40Consumer spending is influenced by factors such as income, the desire to save, and changes in disposable income. These factors determine the slope of the consumption function.