CONSUMPTION FUNCTION

in economics, relationship between consumer spending and the various factors determining it. At the household or family level, these factors may include income, wealth, the price level, expectations about future income, age, education, and family size. One household will spend a larger or smaller proportion of its income than another, depending on these factors. Theoretically, knowledge of the consumption functions of all households in the economy should enable government officials to predict the consequences of changes in taxation or government spending. The difficulty lies in predicting the behaviour of consumers. It is necessary both to know the factors that affect consumer-expenditure patterns and to be able to measure them. Even if consumption were assumed to be a simple function of income, it would be necessary to select a particular income concept. For example, if one takes disposable income in the current period, one might expect the proportion of income spent on consumption to be lower for higher income groups. It is doubtful, though, whether consumption varies according to the absolute level of current income. One alternative view is that the consumption expenditure of a household depends not so much on its current level of income as on the consumption expenditures of other households considered as peers. In other views, consumption-expenditure levels are proportionately related to the household's concept of its lifetime, or permanent, incomethat is, each family has a long-range view of what its average income will be over its lifetime and adjusts its consumption expenditure to this, rather than to its actual income. Income in any given year may be above or below this projected lifetime average, with the result that consumption may not appear to be a constant proportion of income. This view is consistent with spending patterns in which people go into debt early in life in establishing a household and save during their middle years to enable them to maintain a certain consumption level during retirement.