Many thanks to A2 student Lara Hodgson for this superb cake that the class enjoyed this morning. Remember that the standard Keynesian consumption function is written as follows:
C = a + c (Yd) – where:
- C = total consumer spending
- a = is autonomous spending
- c (Yd) = the propensity to spend out of disposable income
Autonomous spending (a) is consumption which does not depend on the level of income. For example people can fund some of their spending by using their savings or by borrowing money from banks and other lenders. A change in autonomous spending would in fact cause a shift in the consumption function leading to a change in consumer demand at all levels of income. The key to understanding how a rise in disposable income affects household spending is to understand the concept of the marginal propensity to consume (mpc). The marginal propensity to consume is the change in consumer spending arising from a change in disposable income. The higher the mpc the steeper the gradient of the consumption function line. As you can imagine the consumption of cake was fairly rapid.