Induced consumption refers to the part of total spending that changes when national income changes. In simple terms, it is the extra spending that happens because people have earned more money.

The Calculation:

Induced consumption = bY = MPC × Y

In this formula, b represents the Marginal Propensity to Consume (MPC), which measures how much of every extra dollar of income a person chooses to spend rather than save.

Key Characteristics:

• It represents the slope of the consumption function, showing how sensitive consumer spending is to income shifts.
• If national income increases by £1, induced consumption will increase by the value of the MPC.
• A higher MPC means that people will spend a larger portion of their additional income.
• It is a primary driver of the multiplier effect, where one person’s spending becomes another person’s income, leading to further economic activity.
• If national income drops, induced consumption decreases proportionally.
• Understanding the difference between autonomous consumption (spending regardless of income) and induced consumption is essential for the Keynesian model of the economy.