Consumption (economics)

Last updated
People buying home electronics at a shopping mall in Jakarta, Indonesia Mall culture jakarta89.jpg
People buying home electronics at a shopping mall in Jakarta, Indonesia

Consumption, defined as spending for acquisition of utility, is a major concept in economics and is also studied in many other social sciences. It is seen in contrast to investing, which is spending for acquisition of future income. [1]

Contents

Different schools of economists define consumption differently. According to mainstream economists, only the final purchase of newly produced goods and services by individuals for immediate use 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 ]

Economists are particularly interested in the relationship between consumption and income, as modeled with the consumption function.


Function

Behavioural economics, Keynesian consumption function

The Keynesian consumption function is also known as the absolute income hypothesis, as it only bases consumption on current income and ignores potential future income (or lack of). Criticism of this assumption led to the development of Milton Friedman's permanent income hypothesis and Franco Modigliani's life cycle hypothesis.

More recent theoretical approaches are based on behavioral economics and suggest that a number of behavioural principles can be taken as microeconomic foundations for a behaviourally-based aggregate consumption function. [2]

Behavioural economics also adopts and explains several human behavioural traits within the constraint of the standard economic model. These can range from: bounded rationality, bounded willpower, and bounded selfishness. [3]

Consumption and household production

Aggregate consumption is a component of aggregate demand. [4]

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 home-produced substitutes and therefore demand for commercial goods and services. [5] [6] 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. [7]

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 can also be measured by a variety of different ways such as energy in energy economics metrics.

Old-age spending

Spending the Kids' Inheritance (originally the title of a book on the subject by Annie Hulley) and the acronyms SKI and SKI'ing refer to the growing number of older people in Western society spending their money on travel, cars and property, in contrast to previous generations who tended to leave that money to their children.

Die Broke (from the book Die Broke: A Radical Four-Part Financial Plan by Stephen Pollan and Mark Levine) is a similar idea.

See also

Related Research Articles

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Keynesian economics are various macroeconomic theories about how in the short run – and especially during recessions – economic output is strongly influenced by aggregate demand. In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.

Microeconomics branch of economics that studies the behavior of individual households and firms in making decisions on the allocation of limited resources

Microeconomics is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.

Macroeconomics branch of economics that studies aggregated indicators

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies.

IS–LM model Keynesian macroeconomic model about interest rates and assets markets that places general equilibrium (simultaneous equilibria in goods/asset markets) at the intersection of “investment–saving” (IS) and “liquidity preference–money supply” (LM)

The IS–LM model, or Hicks–Hansen model, is a two-dimensional macroeconomic tool that shows the relationship between interest rates and assets market. The intersection of the "investment–saving" (IS) and "liquidity preference–money supply" (LM) curves models "general equilibrium" where supposed simultaneous equilibria occur in both the goods and the asset markets. Yet two equivalent interpretations are possible: first, the IS–LM model explains changes in national income when price level is fixed short-run; second, the IS–LM model shows why an aggregate demand curve can shift. Hence, this tool is sometimes used not only to analyse economic fluctuations but also to suggest potential levels for appropriate stabilisation policies.

John Hicks British economist

Sir John Hicks was a British economist. He was considered one of the most important and influential economists of the twentieth century. The most familiar of his many contributions in the field of economics were his statement of consumer demand theory in microeconomics, and the IS–LM model (1937), which summarised a Keynesian view of macroeconomics. His book Value and Capital (1939) significantly extended general-equilibrium and value theory. The compensated demand function is named the Hicksian demand function in memory of him.

In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is the demand for the gross domestic product of a country. It specifies the amount of goods and services that will be purchased at all possible price levels.

In classical economics, Say's law, or the law of markets, is the claim that the production of a product creates demand for another product by providing something of value which can be exchanged for that other product. So, production is source of demand. In his principal work, A Treatise on Political Economy, Jean-Baptiste Say wrote: "A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value." And also, "As each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase."

In microeconomics, an Engel curve describes how household expenditure on a particular good or service varies with household income. There are two varieties of Engel curves. Budget share Engel curves describe how the proportion of household income spent on a good varies with income. Alternatively, Engel curves can also describe how real expenditure varies with household income. They are named after the German statistician Ernst Engel (1821–1896), who was the first to investigate this relationship between goods expenditure and income systematically in 1857. The best-known single result from the article is Engel's law which states that the poorer a family is, the larger the budget share it spends on nourishment.

Underconsumption

In underconsumption theory in economics, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. It means that there is an overproduction and overinvestment problem during a demand crisis. The theory formed the basis for the development of Keynesian economics and the theory of aggregate demand after the 1930s.

Consumption function

In economics, the consumption function describes a relationship between consumption and disposable income. 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.

In economics, aggregate expenditure (AE) is a measure of national income. Aggregate expenditure is defined as the current value of all the finished goods and services in the economy. The aggregate expenditure is thus the sum total of all the expenditures undertaken in the economy by the factors during a given time period. It is the expenditure incurred on consumer goods, planned investment and the expenditure made by the government in the economy. In an open economy scenario, aggregate expenditure also includes the difference between the exports and the imports.

The permanent income hypothesis (PIH) is an economic theory attempting to describe how agents spread consumption over their lifetimes. First developed by Milton Friedman, it supposes that a person's consumption at a point in time is determined not just by their current income but also by their expected income in future years—their "permanent income". In its simplest form, the hypothesis states that changes in permanent income, rather than changes in temporary income, are what drive the changes in a consumer's consumption patterns. Its predictions of consumption smoothing, where people spread out transitory changes in income over time, depart from the traditional Keynesian emphasis on the marginal propensity to consume. It has had a profound effect on the study of consumer behavior, and provides an explanation for some of the failures of Keynesian demand management techniques.

In economics, Aggregate behavior refers to economy-wide sums of individual behavior. It involves relationships between economic aggregates such as national income, government expenditure and aggregate demand. For example, the consumption function is a relationship between aggregate demand for consumption and aggregate disposable income.

In economics, the microfoundations are the microeconomic behavior of individual agents, such as households or firms, that underpins an economic theory.

AD–AS model Keynesian macroeconomic model that explains price level and output through the relationship of aggregate demand and aggregate supply

The AD–AS or aggregate demand–aggregate supply model is a macroeconomic model that explains price level and output through the relationship of aggregate demand and aggregate supply.

Keynesian cross diagram related to economic theory

The Keynesian cross diagram is a formulation of the central ideas in Keynes' General Theory. It first appeared as a central component of macroeconomic theory as it was taught by Samuelson in his textbook, Economics: An Introductory Analysis. The Keynesian Cross plots aggregate income and planned total spending or aggregate expenditure.

Outline of economics Overview of and topical guide to economics

The following outline is provided as an overview of and topical guide to economics:

History of macroeconomic thought Wikimedia history article

Macroeconomic theory has its origins in the study of business cycles and monetary theory. In general, early theorists believed monetary factors could not affect real factors such as real output. John Maynard Keynes attacked some of these "classical" theories and produced a general theory that described the whole economy in terms of aggregates rather than individual, microeconomic parts. Attempting to explain unemployment and recessions, he noticed the tendency for people and businesses to hoard cash and avoid investment during a recession. He argued that this invalidated the assumptions of classical economists who thought that markets always clear, leaving no surplus of goods and no willing labor left idle.

This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.

References

  1. Black, John; Hashimzade, Nigar; Myles, Gareth (2009). A Dictionary of Economics (3 ed.). Oxford University Press. ISBN   9780199237043.
  2. D'Orlando, F.; Sanfilippo, E. (2010). "Behavioral foundations for the Keynesian Consumption Function". Journal of Economic Psychology . 31 (6): 1035–1046. doi:10.1016/j.joep.2010.09.004.
  3. https://journals-scholarsportal-info/pdf/07493797/v44i0002/185_be.xml
  4. "CONSUMPTION GROWTH 101". Archived from the original on 2012-05-06.
  5. Mincer, Jacob (1963). "Market Prices, Opportunity Costs, and Income Effects". In Christ, C. (ed.). Measurement in Economics. Stanford, CA: Stanford University Press.
  6. Becker, Gary S. (1965). "A Theory of the Allocation of Time". Economic Journal. 75 (299): 493–517. doi:10.2307/2228949. JSTOR   2228949.
  7. Grossbard-Shechtman, Shoshana (2003). "A Consumer Theory with Competitive Markets for Work in Marriage". Journal of Socio-Economics. 31 (6): 609–645. doi:10.1016/S1053-5357(02)00138-5.

Further reading