Consumer function

In economics , the consumption function is a behavioral equation that describes the relationship between consumption and income . In addition to income, there are other influencing variables such as wealth or interest that can flow into the consumption function. There are various assumptions for macroeconomic consumption functions that differ in terms of the influencing variables involved and in the respective periods considered.

Absolute income hypothesis

The absolute income hypothesis goes back to John Maynard Keynes and is therefore also known as the Keynesian consumption function. According to this, the consumption depends only on the income of the current period. This is where his theory differs significantly from the neoclassical theory , where consumption depends on past or expected future income.

The relationship between consumption (C) and income (Y) can be shown as follows:

${\displaystyle C=C(Y)}$

According to the Keynesian consumption function, income is the only influencing variable that can also be changed in the short term. Keynes considered a total of 24 factors that can influence consumption. This also includes the interest rate, which is the main influencing factor in neoclassical theory .

Keynes names a number of other influencing factors for household consumption. However, since these are not very variable under “normal terms” or are largely balanced on average for households, he neglects these factors for his further theory.

He lists the following factors:

• the spread between gross and net income
• the change of assets
• the change in time preference
• the interest rate (although the amount and direction can hardly be determined a priori)
• the distribution of income
• the expectation of future income development.

Other conceivable factors that he does not consider are:

• higher expenses or lower income in the future (e.g. education, pension) with the desire for even consumption ("foresight")
• lower time preference than the real interest rate: desire for interest income ("calculation")
• Desire for continuously increasing consumption ("Improvement")
• Independence of the economy from the state ("Independence")
• Equity for start-ups or speculation ("Enterprise")
• Inheriting assets ("Pride")
• Avarice: the negative benefits of consumption as such (“Avarice”).

The gap in Keynes' theory was closed after World War II by the consumption theory of Franco Modigliani , James Duesenberry and Milton Friedman .

function

Consumption results from autonomous consumption ( ) and disposable income (Y) multiplied by the marginal propensity to consume ( ). ${\displaystyle C_{a}}$ ${\displaystyle c_{Y}}$

${\displaystyle C(Y)=C_{a}+c_{Y}\cdot Y}$

Properties of the consumption function

According to John Maynard Keynes, the consumption function has the following properties:

1. Consumption C always increases with an increase in income.
2. Autonomous consumption is greater than 0: ${\displaystyle C_{a}>0}$
3. The marginal propensity to consume is between 0 and 1: ${\displaystyle C_{Y}\in (0,1)}$
4. The average consumption rate (C / Y) decreases with increasing income Y.

example

${\displaystyle C=100+0,8Y}$

The autonomous consumption here is 100 units (e.g. euros). This means that households spend 100 euros to cover their basic needs (e.g. food), regardless of how much disposable income there is (i.e. even if there is no income). The marginal propensity to consume is 0.8. Households therefore spend 80 cents of every additional euro in income on consumer goods and save 20 cents.

Assuming an available income (Y) of 1000 euros, the following results: 100 euros will be spent on basic needs anyway and 800 euros for other consumer goods, 100 euros will be saved. This results in a consumption (C) of 900 euros.

application

In addition to investments and government spending, the consumption function is part of the demand for goods (also: aggregate demand ) and is therefore used in the IS function .

Relative income hypothesis

The relative income hypothesis was justified by James Duesenberry and considers not only the income of the current period but also that of the previous period (s).

Permanent income hypothesis

In the permanent income hypothesis of Milton Friedman , the habits based on an average value of current and future income expectations. Temporary income deviations therefore have hardly any impact on the consumer behavior of private households. Interest payments are also taken into account here.

Life cycle hypothesis

According to the life cycle hypothesis established by Franco Modigliani , private households make their consumption decisions based on their expected lifetime income.

criticism

Looking at the work of Keynes, Duesenberry, Friedman and Modigliani, one can speak of progress in the analysis of consumer behavior. While Keynes still assumed that consumption mainly depends on current income, in the following period future income was also included in the consumption function. According to the current state of research, it is assumed that consumption depends on both current and expected future income, as well as wealth and interest rates.

literature

• Franz W. Peren: Income, consumption and savings of private households in the Federal Republic of Germany since 1970: Analysis using macroeconomic consumption functions. Peter Lang, Frankfurt am Main / Bern / New York 1986, ISBN 3-8204-9006-X .

Individual evidence

1. ↑ Reiner Clement, Wiltrud Terlau: Fundamentals of Applied Macroeconomics. 2nd edition, Vahlen, Munich 2002, p. 135.
2. ↑ ^{a b} Reiner Clement and Wiltrud Terlau: Fundamentals of Applied Macroeconomics. 2nd edition, Vahlen, Munich 2002, p. 136.
3. ^ Bernhard Felderer and Stefan Homburg : Macroeconomics and new macroeconomics. 8th edition, Springer-Verlag, Berlin / Heidelberg 2003, pp. 104, 105.
4. ^ Bernhard Felderer and Stefan Homburg : Macroeconomics and new macroeconomics. 8th edition, Springer-Verlag, Berlin / Heidelberg 2003, p. 105
5. ^ N. Gregory Mankiw: Macroeconomics. 4th edition, Schäffer-Poeschel, Stuttgart 2000, pp. 480, 481
6. ↑ Olivier Blanchard and Gerhard Illing: Macroeconomics. 3rd edition, Pearson Studium, Munich 2004, pp. 82, 83.
7. ↑ Reiner Clement and Wiltrud Terlau: Foundations of Applied Macroeconomics. 2nd edition, Vahlen, Munich 2002, p. 138.
8. ↑ Reiner Clement, Wiltrud Terlau: Fundamentals of Applied Macroeconomics. 2nd edition, Vahlen, Munich 2002, p. 139.
9. ↑ Gustav Dieckheuer: Macroeconomics: Theory and Politics. 4th edition, Springer-Verlag, Berlin / Heidelberg 2001, p. 410.
10. ^ N. Gregory Mankiw: Macroeconomics. 4th edition, Schäffer-Poeschel, Stuttgart 2000, p. 506.