3.1 Building a consumption function (1)
According to Keynes, there is a fairly stable relationship between planned consumption and current income. Households plan to spend a fairly constant proportion of each additional pound they earn. He calls this proportion the ‘marginal propensity to consume’. To present this diagrammatically, we start with two axes at right-angles to each other.
Activity 3
The horizontal axis of Figure 4 shows income (Y) and the vertical axis shows planned consumption (C).
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Figure 4 Plotting planned consumption against income
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Suppose that consumers plan to spend 70 pence of each additional pound they earn. The marginal propensity to consume is 0.7. The usual symbol for the marginal propensity to consume is b. So, we can say b = 0.7.
Click on three points on Figure 4 which would lie on the consumption function.