A Theory of the Consumption Function

A Theory of the Consumption Function, developed by economist Milton Friedman, explains how people decide to spend or save their income. It suggests that individuals base their spending on their current income and some average of past income, smoothly adjusting their consumption over time. The theory highlights that most people tend to consume a fixed portion of their income, but also that their consumption habits are influenced by expectations and income stability. Overall, it provides a framework to understand how economic fluctuations and policies can affect consumer behavior and aggregate demand in the economy.