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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.
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.
where
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 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]