Page 205 - Krugmans Economics for AP Text Book_Neat

figure 16.2

The Consumption Function Household
consumer Consumption
The consumption function relates a house- function, cf
spending, c
hold’s current disposable income to its c = a + MPC × y d
consumer spending. The vertical intercept,
a, is individual household autonomous
consumer spending: the amount of a
household’s consumer spending if its cur- Slope = MPC Section 4 National Income and Price Determination
rent disposable income is zero. The slope
of the consumption function line, cf, is the Δc = MPC × Δy d
marginal propensity to consume, or MPC:
of every additional $1 of current dispos-
able income, MPC × $1 is spent. Δy d
a

Household current disposable income, y
d

Figure 16.2 shows what Equation 16-5 looks like graphically, plotting y d on the hor-
izontal axis and c on the vertical axis. Individual household autonomous consumer
spending, a, is the value of c when y d is zero—it is the vertical intercept of the consump-
tion function, cf. MPC is the slope of the line, measured by rise over run. If current dis-
posable income rises by Δy d , household consumer spending, c, rises by Δc. Since MPC is
defined as Δc/Δy d , the slope of the consumption function is:

(16-8) Slope of consumption function
= Rise over run
=Δc/Δy d
= MPC

In reality, actual data never fit Equation 16-5 perfectly, but the fit can be pretty
good. Figure 16.3 shows the data from Figure 16.1 again, together with a line drawn to
fit the data as closely as possible. According to the data on households’ consumer

figure 16.3

A Consumption Function Consumer
spending
Fitted to Data
$100,000 cf
The data from Figure 16.1 are reproduced here,
along with a line drawn to fit the data as closely
as possible. For American households in 2008, 80,000
the best estimate of the average household’s
autonomous consumer spending, a, is $17,484 60,000
and the best estimate of MPC is 0.534, or ap-
proximately 0.53.
40,000
Source: Bureau of Labor Statistics.
20,000

0 $50,000 100,000 150,000 200,000
Current disposable income

module 16 Income and Expenditure 163