The survey was conducted by interviewers under the direction of Abt Associates and is weighted to be representative of the U.S. 8, 2021, by cellphone and landline phone. But, you could argue, that maybe a more complex model is justified.To better understand Americans’ use of social media, online platforms and messaging apps, Pew Research Center surveyed 1,502 U.S. So we had a marginal propensity to consume that was constant of 0.6. In our first model, we had a very basic marginal propensity to consume. Essentially what I'm describing here is a marginal propensity As they become richerĪnd richer and richer, as their income goes higher and higher, they're going to spend less and less a fraction of their disposable income. Maybe when income is low, for every incremental dollar of income, people are probably going to spend a lot. Maybe the consumptionįunction looks like this. Has some intersection, some base level of consumption. That we tend to study in introductory economicsĬlasses will look like this. But the one thing I just want to highlight is it's a very simple idea. That in future videos when we dig into the marginal propensity to consume a little bit more. If you remember a littleīit of your slope, you could view this as your y intercept, or in this case your c intercept, and that your slope would be the. In this particular case we have a consumption function that looks something like this. That would be theĬoordinate: 1,000 1,100. This right over here, would correspond to so 1,000, so this might be 1,000 on this axis so this would be 1,100 to Going to be in our units? Our consumption is going to be equal to 500 + 0.6 x 1,000 which is equal to 500 + 600 which is equal to 1,100. I don't want to keep having to say that over and over again. Let's say this is 1,000īillion clamshells. Let's say disposable income is 1,000 whatever our units are. Then you have 500 billion dollars, or whatever our unitsĪre, of base consumption. If there's zero disposable income, then this whole term right over here is 0. This is I'll call it disposable income and this is consumption. If there is zero disposable income, maybe I'll draw a little table over here. That could be in billions of dollars or clamshells or whatever else. We just constructed a consumption function that happens to be a line. We can graph this, what'sĮssentially going to be a line. Instead of a y, we have a c, but that's still the dependent variable. They obviously can't spendĪ fraction of stuff that they don't have, the stuff
Here because that's actually a more reasonable thing to say. What you have left over when you subtract taxes out of income, that With all of that in your checking account or your pocket or your savings account. You have your income but you don't end up Your pay stub this will become familiar to you, Income, and if you spend any time looking at But some of it goes off to the government.
Up in firms' pockets," but the firms, at the end of the day, are owned by individuals, so it can end up in individuals' or consumers' pockets. Just for a simplification, you might say, "Yeah, some of it ends Income in an economy does not end up in consumers' pockets. Just to clarify our model, between income and disposable income because all of the aggregate Above and beyond the base level, they'll spend 60% of I'll want to do that in a different color. Actually, to be a littleīit more particular, I'll write not just income, Let's say if there's some above and beyond the base level, they're going to spend 0.6 of any aggregate income they have. Is some aggregate income, people will spend 60% of it. It could be billions ofĭollars or gold coins or clamshells or whatever the unit of measuring economicĪctivity is in our economy.
Let's say that base level of consumption, let's call that 500. They're essentially using resources that they've alreadyĪccumulated in some way. Maybe people can do it byĭigging into their savings. well, maybe there's someīase level of consumption even if there's no aggregate Maybe we have a hypothetical economy where consumption is All the numbers don't have to be exactly what I'm about to do, but this is just to make things concrete in your mind. Tangible, I will construct a consumption function forĪ hypothetical economy, and we can debate whether weĬan construct a better one. It's really just the notion that income, income in aggregate in an economy can drive consumption inĪggregate in an economy. This video is introduce you to the idea of a consumption function.
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