Consumption Function
- OK, we're working with the consumption function, consumption equals autonomous consumption plus marginal propensity to consume disposable income. And we have some values. This one is 300 plus 0.6 disposable income. That's our marginal propensity to consume.
Now what we have to do is to put this in a diagram, and we do it like this. This is our horizontal axis, and we put disposable income on this axis. And here we put consumption spending.
Now given the information, this 300 will be our intercept here of 300, the autonomous part of consumption. And the slope of the line is determined by the marginal propensity to consume. In this case, it will be [? one ?] more [? 0.6 ?] meaning for every [INAUDIBLE] increase in disposable income, your consumption will increase [? with ?] $0.60. Then we say let's show what happens if income increases from 500 to 600 in this consumption model. And it's done like this.
Assume this is 500. And it means this will be the consumption at 500, and this increased to 600. That's an increase of 100. In other words, that 600, that will be the consumption. Now the increase here, given the marginal propensity of 0.6, equals 60. So we can see now our increase of 100 leads to increase of 60.
There's another way you could have done this is by just using your consumption function. It's like the one where your output is 500. Then we say that means consumption is 300 plus 0.6, 500 equals 300 plus 300, equals 600. And this value here will be 600.
At the value of 600 for the level of output, we get 300 plus 0.6 times 600. It's 300 plus 360 equals 660. So at this level here, it is 660. There is your increase of 60 from 600 to 660.