Consumption Function

Definition:

Keynes devised this function to state consumer spending as one term. It is shown as a linear function and explains how consumption expenditure depends on the level of income. The consumption function shows that what people spend depends on their income, and that as income increases, so does consumption.

C = a + mpc * Y

Where
c = total consumption

a = autonomous consumption i.e. consumption when income is zero so therefore it is consumption which is not influenced by current income.

mpc = the marginal propensity to consume i.e. the rate at which consumption is changing when income changes.

Y=disposable income

Note also that mpc * Y is induced consumption , i.e. consumption influenced by the economy’s income level.

The concept revolves around the fact that a consumer’s expenditure depends on his or her disposable income. Real income is money income adjusted for inflation. It is a measure of the quantity of goods and services that consumers have buy with their income.
·There is normally a positive relationship between disposable income and consumer spending. This fraction of additional income that people spend is called the marginal propensity to consume. MPC = (change in consumption) divided by (change in income)The gradient of the consumption curve gives the marginal propensity to consume. As income rises, so does total consumer demand.
· A change in the marginal propensity to consume causes a pivotal change in the consumption function. In this case the marginal propensity to consume has fallen leading to a fall in consumption at each level of income.

The Keynesian consumption function is based on current income only and does not consider future income . Therefore extensions of this theory are Friedman's permanent income hypothesis and Modigliani's life cycle hypothesis.

Example:
An increase of disposable income could result in higher level of consumer expenditure. Also, the level of consumption depends on the change in MPC. As the MPC goes up, the consumption will increase.

References:
www.businessdictionary.com
www.tutor2u.net/economics/content
http://en.wikipedia.org/wiki/Consumption_function
http://www.ingrimayne.com/econ/Keynes/SimpleModel.html