Can you make this sound more put together There is proof from real-worlds data that supports the idea that people make consumption choices based on their preference and utility maximisation. This claim can be supported by both macro-economic time series data and micro founded equilibrium models.

The theory of consumption implies an act of using resources to satisfy individual preferences and budgetary constraints. 
It implies a theory of saving as savings= income- Consumption (S= Y - C)





Saving is the basis for capital accumulation

The consumption function- the propensity to consume is a fairly stable function so that as a rule, the amount of aggregate consumption mainly depends on aggregate income… 

Real private consumption during period t, denoted by Ct is mainly determined by real disposable income Y^d during that period= Ct= C(Y^dt)

People’s consumption increases as income increases, but not by as much as the increase in their income, its only by a certain percentage 

MPC= C^’=dCt/dY^dt, is positive but less than one 

It is obvious that a higher level of absolute income will tend to, as a rule widen the gap between income and consumption, therefore as a rule a greater proportion of income will be saved as real income increases 

Therefore Keynes believed that the average propensity to consume Ct/Y^dt, will decrease with the level of income, the rich save more money than the poor 
The consumption function based on a Keynesian model becomes 
Ct= a +bY^dt


The consumption function issues
Not clear why current consumption is positively related to current income and not expected future income and the real rate of interest- it is doubted that it is consistent with optimising behaviour 
Although micro-economic cross-section data shows that the rich save more than the poor, macroeconomic time series data indicated that the ratio of aggregate consumption to aggregate income is roughly constant over the long run
Long run consistency of the average propensity to consume is illustrated for the U.S and Denmark shows the US besides the war being stable over the long run whilst Denmark being more volatile without any systematic trend

Challenges arise in capturing the complexity of individual decision-making. Behavioural economics suggests that individuals may not always behave as assumed, as rational individuals like some traditional micro-economic models suggest but that rationality can influence consumption adding a layer of complexity to the empirical analysis

This shows us that there is a need to explain why we observe different relationships between consumption and income in micro economic cross-section data and in macroeconomic time series data

Consumer preferences in micro-based theory- the concept of utility maximisation. Individuals make consumption decisions to maximise their overall satisfaction or utility given their budget constraint

In each period present and future t (t=1,2) the consumer derives utility u(Ct) from consumption. Because the consumer is expected to be ‘impatient’ they prefer to consume a unit of utility today do a unit of utility tomorrow. 
At the beggining of period 1 the consumers lifetime utility U is therefore given by: U= u(C1)+u(C2)/1+o/

Our theory of consumption is derived from the assumption that the consumer trades off present against future consumption so as to maximise their lifetime utility function. The terms of this trade- off will depend on the consumers Inter temporal budget constraint 

Which can be given by 
C1+C2/1+r= V1 +H1
Assuming V1+H1>0
Where capital markets are assumed to be perfect and states that present value of the consumers lifetime consumption must equal present value of their net income plus the initial financial wealth

With a budget constraint for period 1, the present being:
V2= (1+r)(V1+Y^L1-T1-C1)

And a budget constraint for period 2, the future being:
C2=V2+Y^L2-T2

The consumers Inter temporal budget constraint states that the present value of real lifetime consumption is constrained by total real initial wealth.

Consumption and wealth
Consumption and interest rates 
Consumption and taxes 

The Ricardian equivalence theorem- 
a temporary switch from lump sum tax finance to debt finance of public spending will not affect private consumption since the Inter temporal government budget constraint implies that the present value of future taxes will rise by the same amount as the current taxes go down, realising this rational forward-looking consumers will save and expect a future higher tax bill and some consumers may be short sighted or may expect part of the higher future tax burden to fall on future generations meaning they will spend their current tax cut immediately even if they realise that future taxes will go up 

Although we assumed that consumption of liquidity constrained consumers will depend only on current disposable income, it is realistic to assume consumers will not be credit constrained 

A rise in the real interest rate will have offsetting income and substitition effects on the propensity to consume current wealth, reduces the propensity to consume current wealth

C1=C(Y^d1, g, r, V1) 

Expectations feed into consumption


The theory of private consumption is summarised in the generalised consumption function which states that aggregate consumption is an increasing function of current disposable income, of the expected future growth rate of income, and of the current ratio of financial wealth to income. A rise in the real interest rate has a theoretically ambiguous effect, although it is likely to reduce current consumption due to its negative impact on human and financial wealth 

Challenges arise in capturing the complexity of individual decision-making. Behavioural economics suggests that individuals may not always behave as assumed, as rational individuals like some traditional micro-economic models suggest but that rationality can influence consumption adding a layer of complexity to the empirical analysis


On the macro-economic front, the aggregation of individual behaviours form the basis for understanding overall consumption patterns in an economy. Macro-level data, such as national income and expenditure accounts are crucial for assessing the validity of the micro-founded consumption function at a broader scale. Consumption in the micro is very important for aggregate demand as according to Keynes it determines the level of output and employment in the economy. Thus, consumption is important to understand savings, capital stock, investment, employment and income growth- the effectiveness of economic policy is also closely related to the nature of the consumption function. Time-series analysis of macroeconomic data allows researches to observe consumption trends over extended periods of time. Changes in aggregate income are often linked to shifts in income, interest rates and governmental policies.empirical studies explore these relationships, seeking to validate or challenge the predictions of the micro-founded consumption function at the macro level.

One prominent challenge in macro-economic analysis is the prescience of aggregate variables that may mask underlying individual heterogeneity. Aggregating divers behaviours into a single consumption function assumes homogeneity in preferences and decision making processes, which may not hold true in reality. This discrepancy between micro and macro levels highlights the need for careful interpretation of empirical findings. 

Furthermore, the presence of liquidity constraints, credit markets imperfections and uncertainties can complicate the relationship between income and consumption at both micro and macro levels. These factors challenge the simplistic assumptions of perfect markets and complete information inherent in traditional economic models. 

Empirical evidence, therefore presents a nuanced picture. While some studies fins support for the micro-founded consumption function, others reveal discrepancies that prompt adjustments to the theoretical framework. Incorporating elements from the behavioural economics and adressing the limitations of traditional methods, researchers continue refining their understanding of consumption behaviour 

Empirical evidence regarding the micro-founded consumption function is a dynamic and evolving field within economics. Microeconomics studies delve into individual decision making processes, while macro-economic analyses attempt to capture aggregate consumption trends.   
Traditional models create challenges- behavioural factors and the complexities of real-world economic interactions 
The ongoing findings and theories contribute to a deeper understanding of consumption behaviour, bridging the gap between micro and macro perspectives.