ECON 0110 1st Edition Lecture 18 SECTION 15:THE CONSUMPTION FUNCTIONCONSUMPTION FUNCTIONExpresses household consumption spending as a function of disposable incomeHolding all other variables constantTHE CONSUMPTION FUNCTIONThree things to do with household income (Y)1. Spend it (Consumption = C)2. Save it (Saving = S)3. Pay taxes (Taxes = T)Y = C + S + TDISPOSABLE INCOME: Yd= Income available after paying taxesYd = Y - T = C + SSOME OTHER VARIABLES that influence the level of household consumptiospendingWealthExpected future incomeExpected inflation ratesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Level of interest ratesWEALTH VERSUS INCOMEWEALTH (OR NET WORTH): Value of what you own minus what you oweINCOME:Amount you earn in a given time periodWealth is what you have saved over your lifetimeAn old person could be extremely wealthy and have almost no incomeCONSUMPTION FUNCTION FOR A HOUSEHOLDConsumption spending increases as income increasesC = f(Y)or sometimes we writeC = f(Yd)The relationship between consumption and income is close to linearSlope of function decreases as income
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