The consumption function (also known as the consumption schedule) describes the relationship between total spending on goods and services and the level of national income. It illustrates how much households intend to spend at various income levels.

Formula: C = a + bY

Where:

• a = autonomous consumption (spending when income is zero)
• b = marginal propensity to consume (MPC) (the portion of extra income spent)
• Y = national income

Key features:

• Based on the Keynesian hypothesis, it assumes that consumption depends mainly on current income.
• The intercept (a) shows spending that occurs even with no income, usually supported by savings or borrowing.
• The slope (b) represents the MPC, which is the percentage of additional income that households choose to spend.
• If the MPC increases, the consumption function moves upward.
• It is used in the 45-degree line diagram, where the point of intersection between the consumption line and the 45-degree line represents economic balance (where C = Y).
• Changes in wealth, interest rates, consumer confidence, and income distribution can cause the consumption function to shift.