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title=Consumption_function&printable=yes
Consumption is major concept in economics and is also studied by many other social sciences.
Economists are particularly interested in the relationship between consumption and income, as
modeled with the consumption function.
where
of consumption
. The concept is believed to have been introduced into macroeconomics by John
Maynard Keynes in 1936, who used it to develop the notion of a government spending multiplier.[2] Its
simplest form is the linear consumption function used frequently in simple Keynesian models:[3]
where
is the slope of the consumption function. One of the key assumptions of Keynesian
economics is that this parameter is positive but smaller than one, i.e.
.[4]
Criticism of the simplicity and irreality of this assumption lead to the development of Milton
Friedman's permanent income hypothesis, and Richard Brumberg and Franco Modigliani's life-cycle
hypothesis. But none of them developed a definitive consumption function. Friedman, although he got
the Nobel prize for his book A Theory of the Consumption Function (1957), presented several different
definitions of the permanent income in his approach, making it impossible to develop a more
sophisticated function. Modigliani and Brumberg tried to develop a better consumption function using
the income got in the whole life of consumers, but them and their followers ended in a formulation
lacking economic theory and therefore full of proxies that do not account for the complex changes of
today's economic systems.
Until recently, the three main existing theories, based on the income dependent Consumption
Expenditure Function pointed by Keynes in 1936, were Duesenberry's (1949) relative consumption
expenditure,[5]Modigliani and Brumberg's (1954) life-cycle income, and Friedman's (1957) permanent
income.[6]
Some new theoretical works are based, following Duesenberry's one, on behavioral economics and
suggest that a number of behavioural principles can be taken as microeconomic foundations for a
behaviorally-based aggregate consumption function.[7]