Powered by AI

Copilot

Sure, let’s delve into the concepts of the consumption function and the saving function.

Consumption Function The consumption function is an economic formula that represents the functional
relationship between total consumption and gross national income. It was introduced by British economist John
Maynard Keynes, who argued the function could be used to track and predict total aggregate consumption
expenditures. The consumption function is represented as:

$$ C = A + MD $$

where:

$C$ is consumer spending,

$A$ is autonomous consumption (the minimum level of consumption that occurs no matter the level of
income),
$M$ is the marginal propensity to consume (the increase in consumer spending due to an incremental
increase in income), and
$D$ is real disposable income.

For example, if a family spends $500 on necessities no matter their income, that amount is autonomous
consumption. If they then spend 0.75 (or 75%) of any income they earn, their marginal propensity to consume is
0.75.

Saving Function The saving function, also known as the propensity to save, expresses the relationship between
saving and the level of income. It is simply the desire of households to save a part of their total disposable income.
The functional relation between saving and income can be defined as $S = f(Y)$, where $S$ is saving and $Y$ is
income. The equation for the saving function derived from the consumption function is:

$$ S = Y - C $$

where $S$ is saving, $Y$ is income, and $C$ is consumption. This equation shows that the remaining amount
after the deduction of total expenditure from total income is saving.

For example, if a household earns $1000 and spends $800 on goods and services, then their saving would be $200.

These functions are fundamental to understanding how households divide their disposable income between
consumption and saving, and how these decisions affect the broader economy. They are key components in many
macroeconomic models.