Consumption function

[1][2] The concept is believed to have been introduced into macroeconomics by John Maynard Keynes in 1936, who used it to develop the notion of a government spending multiplier.

[3] Its simplest form is the linear consumption function used frequently in simple Keynesian models:[4] where

is the induced consumption that is influenced by the economy's income level

Keynes proposed this model to fit three stylized facts:[5] By basing his model in how typical households decide how much to save and spend, Keynes was informally using a microfoundation approach to the macroeconomics of saving.

[7] Keynes also took note of the tendency for the marginal propensity to consume to decrease as income increases, i.e.

[8] If this assumption is to be used, it would result in a nonlinear consumption function with a diminishing slope.

Further theories on the shape of the consumption function include James Duesenberry's (1949) relative consumption expenditure,[9] Franco Modigliani and Richard Brumberg's (1954) life-cycle hypothesis, and Milton Friedman's (1957) permanent income hypothesis.

[10] Some new theoretical works following Duesenberry's and based in behavioral economics suggest that a number of behavioural principles can be taken as microeconomic foundations for a behaviorally-based aggregate consumption function.