Consumption Spending

Consumption Spending
Consumption spending is consumer spending; both autonomous and induced. Autonomous consumer spending means that it is independent of the income received. For example: groceries, rent, fuel for a car. This causes demand for many of these products to be inelastic. On the other hand, the other portion of consumption spending is induced. Induced spending is affected by the inflow of net income in an economy. For example things like Cd players, IPods, and other luxury items. Induced spending and autonomous spending are added together to become the consumption function. This is a portion of the aggregate expenditure function. The consumption function is used with others to help decipher our total aggregate demand within the economy.

The consumption line above is a graphical representation of the consumption function. It does not begin at zero as the autonomous portion pushes it up. The value of the autonomous portion can be found at the base value point of the graph. The induced portion can be calculated from the slope of the line.
The consumption function can rise and fall based on the marginal propensity to consume. This is the change in consumption divided by the change in income. A rise in income increases demand, leading to a change in consumption. When the marginal propensity to consume changes, it affects income at every level of consumption. This then causes the Consumption function line to either rise or fall.
A fall in interest rates, rise in consumer’s wealth, or an increase in consumer expectations can also cause a shift in the consumption function line.
Principles of Macroeconomics, 6/e
John E. Sayre, Simon Fraser University
Alan J. Morris, Capilano University

ISBN: 0070984069
Copyright year: 2009