Economic Inputs

Consumption & Savings

Total Consumption (C)
$9000.00
Total Savings (S)
$1000.00
Marginal Propensity to Save (MPS)
0.20
Spending Multiplier
5.00
Income Distribution

The Consumption Function is a macroeconomic formula developed by John Maynard Keynes that shows the relationship between total consumer spending and total disposable income in an economy.

The Consumption Function Formula

The mathematical representation of the consumption function is:

C = a + b(Yd)

Where:

  • C (Total Consumption): Total household spending.
  • a (Autonomous Consumption): The minimum level of consumption that would still exist even if income was exactly zero. People must still buy food and pay rent, funding it through borrowing or draining past savings (dissaving).
  • b (Marginal Propensity to Consume - MPC): A decimal representing the percentage of every new dollar earned that gets spent rather than saved.
  • Yd (Disposable Income): Total national income minus net taxes.

For example, if Autonomous Consumption is 1,000 dollars, MPC is 0.8 (meaning people spend 80 cents of every new dollar), and Disposable Income is 10,000 dollars: Total Consumption equals 1,000 + (0.8 × 10,000) = 9,000 dollars. The remaining 1,000 dollars becomes Total Savings.

How to Use This Tool

  • Enter Autonomous Consumption (a).
  • Enter the Marginal Propensity to Consume (MPC). This must be a decimal between 0 and 1.
  • Enter the Disposable Income (Yd).
  • Review your Total Consumption and Total Savings.
  • Check the Spending Multiplier. This indicates how much a $1 increase in government spending or investment will exponentially ripple through the economy due to re-spending.

Frequently Asked Questions

What is the Marginal Propensity to Save (MPS)?

Because every dollar earned must be either spent or saved, the MPC and the MPS must always equal exactly 1. Therefore, MPS = 1 - MPC. If consumers spend 80% of new income (MPC = 0.8), they inherently save the remaining 20% (MPS = 0.2).

What happens if Total Savings is negative?

If Total Savings is negative, the economy is experiencing dissaving. This happens when Total Consumption exceeds Disposable Income. It means households are taking on debt or depleting their past accumulated wealth just to fund their current standard of living.