3 The consumption function

So far, we have been representing what happens in the economy using the circular flow of income model.

To demonstrate Keynes’s theories about equilibrium in a more quantifiable way, we need to use what is called the aggregate demand model. The two main components of this model are consumption and investment. Section 6 will show you an extended version of this model which includes government expenditure, but for now, Figure 3 represents an economy with no government and no trade and relations with other countries. This section consolidates your understanding of the first element in this model: the consumption function.