In a straight line consumption function, the slope of consumption curve is constant showing that a constant fraction of increased income is being consumed. This constant fraction is nothing but the MPC which is denoted by the letter ‘b’. Thus, at an income level Y, the consumption expenditure will be bY. But as we are well aware, there is always certain minimum consumption expenditure that has to be incurred even when income level is zero. A person even with no income must consume something to keep himself alive. Thus, even at zero level of income, some consumption expenditure is incurred.
This expenditure at zero level of income is called autonomous consumption expenditure which is shown by the intercept made by the consumption curve on the Y-axis. In the diagram the intercept OC shows the expenditure at zero income level. In mathematical language we denote this consumption expenditure at zero income level by the letter ‘a’. Now, the total consumption expenditure at any income level Y consists of expenditure at zero income level ‘a’ plus portion income consumed ‘bY’ at that level of income (Y). Hence, equation for a straight line consumption function is
C = a + bY
Where 'a' is autonomous consumption (i.e., consumption expenditure independent of the income level and is there even when income level is zero), 'b' is the MPC or the fraction of income consumed and Y is the level of income. Thus, bY is the induced consumption expenditure, i.e., consumption expenditure resulting from change in income induced consumption expenditure.SUBMIT ASSIGNMENT NOW!