AP_Krugman_Textbook

module 16 Income and Expenditure 163

Section 4 National Income and Price Determination

Figure 16.2 shows what Equation 16-5 looks like graphically, plotting ydon the hor-
izontal axis and con the vertical axis. Individual household autonomous consumer
spending,a,is the value of cwhenydis zero—it is the vertical interceptof the consump-
tion function, cf. MPCis the slopeof the line, measured by rise over run. If current dis-
posable income rises by Δyd, household consumer spending, c,rises by Δc.SinceMPCis
defined as Δc/Δyd,the slope of the consumption function is:

(16-8) Slope of consumption function

=Rise over run

=Δc/Δyd

=MPC

In reality, actual data never fit Equation 16-5 perfectly, but the fit can be pretty
good. Figure 16.3 shows the data from Figure 16.1 again, together with a line drawn to
fit the data as closely as possible. According to the data on households’ consumer

figure 16.2

The Consumption Function

The consumption function relates a house-

hold’s current disposable income to its

consumer spending. The vertical intercept,

a,is individual household autonomous

consumer spending: the amount of a

household’s consumer spending if its cur-

rent disposable income is zero. The slope

of the consumption function line, cf,is the

marginal propensity to consume, or MPC:

of every additional $1 of current dispos-

able income, MPC×$1 is spent.

a

Household

consumer

spending,c

Household current disposable income, yd

Consumption

function,cf

Slope = MPC

Δyd

Δc = MPC ×Δyd

c = a + MPC × yd

figure 16.3

A Consumption Function

Fitted to Data

The data from Figure 16.1 are reproduced here,

along with a line drawn to fit the data as closely

as possible. For American households in 2008,

the best estimate of the average household’s

autonomous consumer spending, a,is $17,484

and the best estimate of MPCis 0.534, or ap-

proximately 0.53.

Source:Bureau of Labor Statistics.

$50,000 100,000 150,000 200,000

$100,000

80,000

Consumer

spending

Current disposable income

60,000

40,000

20,000

cf

0