Economics "Ask the Instructor" Clip 26 Transcript
Is there any way to make sense out of the consumption function?
Yes, there is and we should spend a little time with this because the consumption and the related marginal propensity to consume are terms that are very important.
What if someone asked you to predict the weight of children you have not yet seen? Assume further that you are allowed to ask only one question about each child. It could be gender, parents’ weight, the child’s eating habits, the child’s age, or any other question. Your prediction must be based on just one piece of information.
What information would you choose? Well, maybe you would say age. Admittedly, the more information, say parents’ weight, that you have about each child the better your prediction. All we are saying here is that the weight depends on many things. Put differently, weight is a function of many variables.
When economists speak of consumption functions they are simply saying that the level of household consumer spending depends on many things. Things like wealth, expectations, confidence or pessimism, and of course income. Your study of consumption will focus on income as the principal influence. This relationship is positive. That is, as income rises, consumers spend more on goods and services.
Economists also emphasize the relationship between changes in income and changes in consumption spending. This is referred to with a snappy title of marginal propensity to consume. Notice that it is analogous to the effect that one more year has on the child’s weight.
Suppose we collected data on weight and age for a large number of children between the ages, say, 5 and 10 years old. What would you expect to find, at least on average? A positive relationship! On average the older children would weight more than the younger children. That’s essentially all that is being hypothesized with the consumption function. Ceteris paribus, we expect families or individuals with higher income to spend more.
When graphing the income-consumption relationship, it is conventional to put consumption on the vertical axis and income on the horizontal. Just as in the case of childrens’ weight and age, the relationship would be positive and the line would be upward sloping..
In summary, don’t let the consumption function create undue anxiety. It’s just a way to express the positive relationship between the level of consumer spending and the level of household income. It says that, ceteris paribus, a change in household income leads to a change in consumer spending. In addition, you will learn about non-income factors that can shift the consumption function. These are analogous to gender, diet, parents’ weight and so forth in our earlier discussion of the association between children’s weight and their age.