The marginal propensity to consume (MPC) is the change in consumption that results from a one-unit change in disposable income. It quantifies how much of an additional unit of income is spent on consumption. In the aggregate consumption function, $C = c_0 + c_1Y_d$, the MPC is represented by the parameter $c_1$. In simplified models without government and taxes, aggregate income ($Y$) is equivalent to disposable income ($Y_d$).

Marginal Propensity to Consume (MPC)

When the aggregate consumption function is depicted on a graph with income (Y) on the horizontal axis and aggregate consumption (C) on the vertical axis, autonomous consumption ($c_0$) is represented by the vertical intercept. This is the point where the consumption line crosses the vertical axis, indicating the level of consumption spending that occurs even when income is zero.

Graphical Representation of Autonomous Consumption

Autonomous consumption, denoted as $c_0$ in the aggregate consumption function, represents the portion of consumption spending that is independent of current income. This term captures all influences on consumption that are not related to the current level of income. While it can be literally interpreted as the amount a person with no income would consume, it is more accurately understood as the baseline level of spending that does not fluctuate with income. The specific factors that determine the value of $c_0$ are themselves an important topic in understanding overall consumption behavior.

Autonomous Consumption (c₀)

The aggregate consumption function is expressed algebraically as $C = c_0 + c_1Y$. This equation breaks down total aggregate consumption ($C$) into two components: autonomous consumption ($c_0$), which is spending that does not depend on income, and induced consumption ($c_1Y$), which is the portion of spending that varies with the level of aggregate income ($Y$).

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The aggregate consumption function describes the relationship between total consumption spending in an economy and its key determinants. In the multiplier model, this function specifies that aggregate consumption is composed of two parts: a baseline amount of autonomous consumption that is independent of income, and a component of consumption that is directly dependent on the level of current aggregate income. This relationship is often represented by a linear equation.

Aggregate Consumption Function

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Macroeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Macroeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Macroeconomics

Aggregate Consumption Function Formula

In a macroeconomic model that includes a government sector, the household consumption model is adapted to account for taxes. Consumption is no longer based on total pre-tax income but on disposable income. The marginal propensity to consume ($c_1$) is therefore defined as the fraction of disposable income that is spent, rather than the fraction of total income.

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