Change in Consumption
Household income is the most significant determinant of consumption demand and the consumption function describes the relationship between income and consumption. Of course, even if one’s income is nothing, one can still consume. Autonomous consumption refers to a degree of consumption that is unaffected by income. This function’s description is as follows:
C = C + cY
The consumption function is represented by the equation above. Household consumption expenditure is symbolized by C. There are two types of consumption: autonomous and induced consumption (cY).
Autonomous consumption (abbreviated as C) refers to consumption that is independent by money, because of autonomous consumption, consumption occurs even when income is nil. The induced component of consumption, cY represents the dependency of consumption on income. When income increases by Re 1, induced consumption increases by MPC, which stands for marginal propensity to consume. It may be described as a change in consumption rate when income varies.
MPC = ∆C/∆Y= c
Let’s have a look at the potential of MPC. Changes in consumption (∆C) can never surpass changes in income (∆Y) when income changes. The highest possible value for c is 1. Consumers, on the other hand, may opt not to adjust their spending habits even though their income has changed. MPC = 0 in this example. MPC is a number that ranges from 0 to 1 in most cases (inclusive of both values). This indicates that as income rises, customers either do not raise consumption at all (MPC = 0), spend the full increase in income (MPC = 1), or utilize a portion of the gain in money to shift consumption (0< MPC<1).
Consider the country of Imaginea, which has a consumption function of C=100+0.8Y.
This means that even when Imaginea’s residents have no income, they still spend Rs. 100 worth of products. The autonomous consumption of Imaginea is 100. Its MPC is 0.8. This suggests that if income in Imaginea rises by Rs. 100, consumption will rise by Rs. 80.
Effect of Autonomous Change in Aggregate Demand on Income and Output
The components of an economy’s aggregate spending that are unaffected by the actual amount of income in that same economy are referred to as autonomous expenditures. This type of expenditure, whether done by the government or by people, is considered automatic and mandatory. A change in autonomous expenditures creates a change in national income and gross domestic product via the multiplier. Autonomous changes are depicted by movements in the aggregate expenditures line in Keynesian economics and the Keynesian cross diagram. Changes in income and production are the result of autonomous changes, which then ‘induce’ changes in aggregate expenditures, notably consumption expenditures, which are the result of induced changes. Understanding business cycle swings requires a two-step process in which autonomous changes produce induced changes.
Consumption that is unaffected by money is referred to as autonomous consumption. In other words, spending on such consumption is made regardless of one’s economic level. It comprises food, clothes, and housing consumption, among other things. It is impossible for such a cost to be zero. C is used to represent this portion of consumer spending. Continuing consumer spending is shown by the bar above C. It does not change regardless of the degree of money.
The amount of income at which the economy is in equilibrium is determined by aggregate demand. As a result, if aggregate demand changes, so do the equilibrium level of income. This can happen in any of the following scenarios, or a combination of them: