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title=Consumption_function&printable=yes
The investment function is a summary of the variables that influence the levels of aggregate
investments. It can be formalized as follows:
I=f(r,Y,q)
where r is the real interest rate, Y the GDP and q is Tobin's q. The signs under the variables simply tell us
if the variable influences investment in a positive or negative way (for instance, if real interest rates
were to rise, investments would correspondingly fall).

The reason for investment being inversely related to the Interest rate is simply because the interest rate
is a measure of the opportunity cost of those resources. If the resources instead of financing the
investment could be invested in financial assets, there is an opportunity cost of (1+r), where r is the
interest rate. This implies higher investment spending with a lower interest rate. When GDP increases,
the output and the capacity utilization increases. This results in an increase of capital investment. At last,
a higher Tobins q is represented when the market puts a high value of the installed capital and buys
stocks in the firm for a higher price. The firm can then raise more resources per share issued and
increase their investments.Investments are often made indirectly through intermediary financial
institutions. These intermediaries include pension funds, banks, and insurance companies. They may
pool money received from a number of individual end investors into funds such as investment trusts,
unit trusts, SICAVs etc. to make large scale investments. Each individual investor holds an indirect or
direct claim on the assets purchased, subject to charges levied by the intermediary, which may be large
and varied.

Approaches to investment sometimes referred to in marketing of collective investments include dollar

cost averaging and market timing.
To invest is to allocate money (or sometimes another resource, such as time) in the expectation of some
benefit in the future.
In finance, the benefit from investment is called a return. The return may consist of capital gain and/or
investment income, including dividends, interest, rental income etc. The projected economic return is
the appropriately discounted value of the future returns. The historic return comprises the actual capital
gain (or loss) and/or income over a period of time.
Investment generally results in acquiring an asset, also called an investment. If the asset is available at a
price worth investing, it is normally expected either to generate income, or to appreciate in value, so
that it can be sold at a higher price (or both).
Investors generally expect higher returns from riskier investments. Financial assets range from low-risk,
low-return investments, such as high-grade government bonds, to those with higher risk and higher
expected commensurate reward, such as emerging markets stock investments.
Consumption is defined in part by comparison to production. In the tradition of the Columbia School of
Household Economics, also known as the New Home Economics, commercial consumption has to be

analyzed in the context of household production. The opportunity cost of time affects the cost of homeproduced substitutes and therefore demand for commercial goods and services.[2][3] The elasticity of
demand for consumption goods is also a function of who performs chores in households and how their
spouses compensate them for opportunity costs of home production.[4]
Consumption is major concept in economics and is also studied by many other social sciences.
Economists are particularly interested in the relationship between consumption and income, as
modeled with the consumption function.

Different schools of economists define production and consumption differently. According to

mainstream economists, only the final purchase of goods and services by individuals constitutes
consumption, while other types of expenditure in particular, fixed investment, intermediate
consumption, and government spending are placed in separate categories (See consumer choice).
Other economists define consumption much more broadly, as the aggregate of all economic activity that
does not entail the design, production and marketing of goods and services (e.g. the selection, adoption,
use, disposal and recycling of goods and services).[citation needed]
Consumption function

Consumption function graph

In economics, the consumption function describes a relationship between consumption and disposable
income.[1] Algebraically, this means
income

where

is a function that maps levels of disposable

income after government intervention, such as taxes or transfer paymentsinto levels

of consumption
. The concept is believed to have been introduced into macroeconomics by John
Maynard Keynes in 1936, who used it to develop the notion of a government spending multiplier.[2] Its
simplest form is the linear consumption function used frequently in simple Keynesian models:[3]

where

is the autonomous consumption that is independent of disposable income; in other words,

consumption when income is zero. The term

economy's income level. The parameter

is the induced consumption that is influenced by the

is known as the marginal propensity to consume, i.e. the

increase in consumption due to an incremental increase in disposable income, since

Geometrically,

is the slope of the consumption function. One of the key assumptions of Keynesian

economics is that this parameter is positive but smaller than one, i.e.

.[4]

Criticism of the simplicity and irreality of this assumption lead to the development of Milton
Friedman's permanent income hypothesis, and Richard Brumberg and Franco Modigliani's life-cycle
hypothesis. But none of them developed a definitive consumption function. Friedman, although he got
the Nobel prize for his book A Theory of the Consumption Function (1957), presented several different
definitions of the permanent income in his approach, making it impossible to develop a more
sophisticated function. Modigliani and Brumberg tried to develop a better consumption function using
the income got in the whole life of consumers, but them and their followers ended in a formulation
lacking economic theory and therefore full of proxies that do not account for the complex changes of
today's economic systems.
Until recently, the three main existing theories, based on the income dependent Consumption
Expenditure Function pointed by Keynes in 1936, were Duesenberry's (1949) relative consumption
expenditure,[5]Modigliani and Brumberg's (1954) life-cycle income, and Friedman's (1957) permanent
income.[6]
Some new theoretical works are based, following Duesenberry's one, on behavioral economics and
suggest that a number of behavioural principles can be taken as microeconomic foundations for a
behaviorally-based aggregate consumption function.[7]