TSR Wiki > Study Help > Subjects and Revision > Revision Notes > Economics > Determinants of Consumption
Keynesian Absolute Income Hypothesis
Main influence on consumption in SR = Current
(Developed in General Theory) Disposable Income
(NB: This is a ‘generalised’ version of the Keynesian Consumption Function as it uses total income rather than disposable income as the independent variable)
Keynesian Consumption Function usually expressed as:
where:
= Consumer expenditure;
= a constant;
= (mpc) marginal propensity to consume (amount consumed out of last pound received);
= National Income.
- MPC: Keynesian view is that when income increases, Cons increases, but by less than , which implies that mpc
- APC: proportion of income consumed (
) will tend to fall as increases.
- The positive constant above ensures this will happen, since:
: +ve constant.
- But – this will only happen if is positive. This implies:
by 
.- If consumption function is a straight line: assuming constant mpc.
- APC: found by measuring slope of radian to appropriate point of consumption function = tangent of α.
- Can be seen that as increases, apc (
) decreases. I.e. as income increases, the proportion of income consumed falls (even with constant mpc 
).
- Effect of SR fluctuations of current disposable income: as aforementioned: for Keynes, main influence on consumption in SR was current disposable income.
When this fluctuated, so would consumption, but because mpc 
, CONSUMPTION would 
by less than the in disposable income.
(Empirical Point: How to derive a consumption function)
(How to find and ) – fit a regression line/line of best fit (best fit in sense that it minimises the sum of squared deviations from line)
From a data table showing - real consumer expenditure - personal savings ratio
- real personal disposable income - in real consumer expenditure
And from that (over a time period), derive apc, mpc.
(UK data over the past 40 years suggests that vertical intercept ~ not significantly diff from zero. If it failed to go through origin – would mean that apc does not fall as rises)
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