Keynesian consumption model

Keynesian consumption theory was introduced by economist John Maynard Keynes in 1936 (in The General Theory of Employment, Interest, and Money). It explains how households decide on consumption and saving, with current disposable income as the main driver.

The basic equation

A common form is:

C = C0 + c · Y

• C: total consumption
• Y: disposable income (income after taxes)
• C0: autonomous consumption (spending that happens even at zero income, e.g. via savings, borrowing, or help)
• c: marginal propensity to consume (MPC), where 0 < c < 1

Intuition

• If income goes up by 1 unit, consumption rises by about c units.
• The rest (about 1 − c) shows up as saving (in this simplified view).

Worked example

Anna earns $3,000/month after taxes.

She has an MPC of 0.8. That means, given her situation, she tends to spend about 80% of any extra income and save the remaining 20%. For example, when her income changes by +$1,000, her spending typically rises by about +$800 (more comfort, convenience, small upgrades), while about +$200 goes to savings or debt repayment. Other people, whose priority is saving/investing, would have a different MPC value.

Assuming her autonomous consumption, i.e. the basic needs budget, is C0 = $500, then:

C = 500 + 0.8 · 3000 = 2900

So her saving is the residual:

S = Y − C = 3000 − 2900 = 100

If her income rises to $4,000:

C = 500 + 0.8 · 4000 = 3700

S = 4000 − 3700 = 300

Core principles (plain language)

• Consumption depends on current income: people spend part of today’s disposable income and save the rest.
• MPC (marginal propensity to consume): the fraction of an extra dollar of income that gets spent. Example: MPC = 0.8 means +$100 income → about +$80 consumption.
• APC (average propensity to consume): the share of income consumed, (APC = C / Y). A common prediction is that APC tends to fall as income rises (richer households save more of each dollar).
• Autonomous consumption: even at zero income, people still consume some minimum amount. That “minimum” often maps to basic living costs—see Basic needs budget.

Relation to saving

In this framework, saving is the residual after consumption:

S = Y − C

Why it shows up in “real life” thinking

This model is often used to reason about how changes in income (wages, taxes, transfers) affect spending, and therefore overall demand in the economy.

Important limitations

• Short-term focus: it emphasizes current income more than lifetime income or expectations.
• Linear form: Keynes used a linear relationship; later work allows more complex shapes.
• It’s a simplified average relationship; individual behavior varies a lot.
• Consumption depends on expectations, wealth, credit access, and uncertainty—not just current income.
• The parameters C0 and c can change over time and across groups.