Induced consumption
Topic: Aggregate Demand, Income Determination and the Multiplier · NCERT: Class 12, Ch 4 "Determination of Income and Employment"
Meaning
Induced consumption is the part of consumption that depends on income. In the consumption function C = C̄ + cY, it is the term cY. Here c is the marginal propensity to consume (MPC), the share of each extra rupee of income that is spent. When income rises, induced consumption rises by c times the rise in income. This is the part of spending that feeds the multiplier, because each round of new income creates more consumption.
Example
Take C = 100 + 0.8Y. If income rises by ₹100, induced consumption rises by 0.8 × 100 = ₹80. The ₹100 of autonomous consumption does not change.
Don't confuse with
- Autonomous consumption (C̄): this is the fixed part that is spent even when income is zero. It does not change when income changes.
Related concepts
- Consumption function
- Autonomous consumption
- Marginal propensity to consume
- Marginal propensity to save
- Average propensity to consume
- Average propensity to save
- Savings