what is the consumption function 
the consumption function is an economic formula that represents the relationship between total consumption and gross national income gni it was first introduced by british economist john maynard keynes who argued that the function could be used to predict total aggregate consumption expenditure the consumption function is a valuable tool for understanding the economic cycle and guiding economists and policymakers as they make key decisions about investments as well as monetary and fiscal policy investopedia sydney saporitounderstanding the consumption functionas noted above the consumption function is an economic formula introduced by john maynard keynes who tracked the connection between income and spending also called the keynesian consumption function it tracks the proportion of income used to purchase goods and services put simply it can be used to estimate and predict spending in the future the classic consumption function suggests consumer spending is wholly determined by income and the changes in income if true aggregate savings should increase proportionally as the gross domestic product gdp grows over time the idea is to create a mathematical relationship between disposable income and consumer spending but only on aggregate levels based in part on keynes psychological law of consumption theory the stability of the consumption function is a cornerstone of keynesian macroeconomic theory this is especially true when it is contrasted with the volatility of an investment most post keynesians admit the consumption function is not stable in the long run since consumption patterns change as income rises the consumption function uses gross national income as a component which is the total amount of income earned by all participants in a nation s economy this includes individuals and businesses in and outside its borders calculating the consumption functionthe consumption function is represented as c a mdwhere c consumer spendinga autonomous consumptionm marginal propensity to consumed real disposable income begin aligned c a md textbf where c text consumer spending a text autonomous consumption m text marginal propensity to consume d text real disposable income end aligned c a mdwhere c consumer spendinga autonomous consumptionm marginal propensity to consumed real disposable income assumptions and implicationsmuch of the keynesian doctrine centers around the frequency with which a given population spends or saves new income the multiplier the consumption function and the marginal propensity to consume are each crucial to keynes focus on spending and aggregate demand the consumption function is assumed stable and static where all expenditures are passively determined by the level of national income the same is not true of savings or government spending both of which keynes referred to as investments for the model to be valid the consumption function and independent investment must remain constant long enough for gross national income to reach equilibrium at equilibrium the expectations of businesses and consumers match up one potential problem is that the consumption function cannot handle changes in the distribution of income and wealth when these change so too might autonomous consumption and the marginal propensity to consume keynes was a proponent of government spending to curb economic downturns economists like milton friedman challenged these notions saying government spending and federal debt could lead to inflation 1other versionsover time other economists have made adjustments to the keynesian consumption function variables such as employment uncertainty borrowing limits or even life expectancy can be incorporated to modify the older cruder function for example many standard models stem from the so called life cycle theory of consumer behavior as pioneered by franco modigliani his model made adjustments based on how income and liquid cash balances affect an individual s marginal propensity to consume this hypothesis stipulated that poorer individuals likely spend new income at a higher rate than wealthy individuals milton friedman offered his own simple version of the consumption function which he called the permanent income hypothesis notably the friedman model distinguished between permanent and temporary income it also extended modigliani s use of life expectancy to infinity more sophisticated functions may even substitute disposable income which takes into account taxes transfers and other sources of income still most empirical tests fail to match up with the consumption function s predictions statistics show frequent and sometimes dramatic adjustments in the consumption function 