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This 3 page Study Guide was uploaded by Shelby Sorrell on Friday October 9, 2015. The Study Guide belongs to ECO2013 at a university taught by Deborah Paige in Fall 2015. Since its upload, it has received 10 views.
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Date Created: 10/09/15
Finding the consumption function Here is some consumption data showing typical consumer spending at several different national income Y levels Y 300000 400000 500000 600000 700000 C 370000 440000 510000 580000 650000 Notice that we have not data for an income close to 0 and that as national income rises so does consumption To find the consumption function we need the autonomous consumption independent of income and the induced consumption caused by income Total consumption is the sum of the two Autonomous consumption is the consumption that is INDEPENDENT of income so work backwards to find what consumption would be when Y 0 Y changes by 1000 at a time so take Y back to 0 Y 0 100000 200000 300000 400000 500000 I600000 700000 C drops by 700 when income drops by 1000 so work backwards with consumption until Y 0 Take the consumption of 3700 and subtract 700 from it to show what C will be when national income is 2000 Y 0 100000 200000 300000 400000 500000 600000 700000 C 300000 370000 440000 510000 5 80000 650000 Keep subtracting 700 from the consumption every time you reduce Y by 1000 Y 0 100000 200000 300000 400000 500000 600000 700000 C 1600 230000 300000 370000 440000 510000 5 80000 650000 Autonomous consumption is 1600 Now we need to find induced consumption Induced consumption is the consumption CAUSED by income so that every time income rises consumption rises by a fraction of the income change The measure of how much consumption changes as a result of an income change is the MPC or Marginal Propensity to Consume Change in consumption MPC Change m Income also written as AC AY Y 0 100000 200000 300000 400000 500000 600000 700000 C 1600 230000 300000 370000 440000 510000 580000 650000 Every time consumption changes it changes by 700 Every time income changes it changes by 1000 The MPC is 700 1000 or 7 What this means is that consumers spend 70 of income in addition to the base level of 1600 in autonomous consumption This gives us the consumption function which is the sum of the two C 1600 7Y You can plug in any given level of income and predict the approximate level of consumption For example if national income were 5000 what would consumers spend C 1600 7Y C 1600 75000 C 1600 3500 C 5100
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