Question

Give the meaning of consumption function and autonomous consumption.

Hint:

In the consumption function \(C = a + bY\), the term \(a\) represents autonomous consumption and \(b\) represents the marginal propensity to consume.

Answer 1

Step 1: Meaning of Consumption Function.
The consumption function refers to the functional relationship between consumption expenditure and income. It shows how the level of consumption in an economy changes with changes in disposable income. In simple terms, it explains how much households spend at different levels of income.
Step 2: Expression of Consumption Function.
The consumption function is generally expressed as:
\[ C = a + bY \]
where \(C\) represents consumption, \(a\) represents autonomous consumption, \(b\) represents marginal propensity to consume (MPC), and \(Y\) represents income.
Step 3: Meaning of Autonomous Consumption.
Autonomous consumption refers to the minimum level of consumption that takes place even when income is zero. It is independent of income and is necessary for basic survival.
Step 4: Explanation of Autonomous Consumption.
When income is zero, people still need to consume essential goods such as food, clothing, and shelter. In such situations, consumption is financed through savings, borrowing, or past wealth. This part of consumption is known as autonomous consumption.