Consumption function

In economics, the consumption function shows a relationship between consumption and disposable income.Algebraically, this means  where  is a function that maps levels of disposable income —income after government intervention, such as taxes or transfer payments—into levels of consumption . It is believed that John Maynard Keynes introduced the idea in macroeconomics in 1936. He used it to develop the idea of a government spending multiplier. 

Details
Its simplest form is the linear consumption function. It is used often in simple Keynesian models:

where  is the autonomous consumption that is independent of disposable income; in other words, consumption when there is no income. The term  is the induced consumption that is influenced by the economy's income level. It is generally assumed that there is no correlation or dependence between  and C.

References

More reading
  (Undergraduate level discussion of the subject.)
  (Graduate level discussion of the subject.)

Other websites
 An essay examining the strengths and weaknesses of Keynes's theory of consumption

Category:Macroeconomics