Consumption (economics)

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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]

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).[2]

Economists are particularly interested in the relationship between consumption and income, as modelled with the consumption function. A similar realist structural view can be found in consumption theory, which views the Fisherian intertemporal choice framework as the real structure of the consumption function. Unlike the passive strategy of structure embodied in inductive structural realism, economists define structure in terms of its invariance under intervention.[3]

Consumption of household is the use of goods and services, this is not to be confused with consumption expenditure or consumer spending. Those describe the amount of money that is spent on goods and services. In those durable goods and other similar expenses are counted differently [4] [5]

Behavioural economics, Keynesian consumption function[edit]

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 behavioural economics and suggest that a number of behavioural principles can be taken as microeconomic foundations for a behaviourally-based aggregate consumption function.[6]

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.[7]

Consumption and household production[edit]

Aggregate consumption is a component of aggregate demand.[8]

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.[9][10] 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.[11]

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.

Consumption in microeconomics[edit]

In microeconomics, consumer choice is a theory that assumes that people are rational consumers. And they decide on what combinations of goods to buy based on their utility function (which goods provide them with more use/happiness) and their budget constraint (which combinations of goods they can afford). [12] Consumers try to maximize utility while staying within the limits of their budget constrain. Or to minimalize cost while getting the target level of utility. [13]A special case of this is the consumption-leisure model where a consumer chooses between a combination of leisure and working time, which is represented by income. [14]

But based on behavioral economics consumers do not behave rationally and they are influenced by other factors than their utility from the given good. Those factors can be the popularity of given good or its position in a supermarket. [15][16].

Consumption in macroeconomics[edit]

In macroeconomics in the theory of national accounts consumption is the amount of money that is spend by households on goods and services from companies. [17] Where consumption is equal to income minus savings. Consumption can be calculated via this formula: [18]

Where stands for autonomous consumption which is minimal consumption of household that is achieved always, by either reducing the savings of household or by borrowing money.

is marginal prosperity to consume where and it tells us how much of household income is spend on consumption.

is the income the household receives.

Consumption as a measurement of growth[edit]

Consumption of electric energy is positively correlated with economical growth. As electric energy is one of the most important inputs of the economy. Electric energy is needed to produce goods and to provide services to consumers. There is a statistically significant effect of electrical energy consumption and economic growth that is positive. But as countries continue to develop this effect is decreasing as they optimize their production, by getting more energy efficient equipment. Or by transferring parts of their production to foreign nations where the cost of electrical energy is smaller. [19]

Life cycle hypothesis[edit]

Is a hypothesis by Franco Modigliani it was published in the 1950s. It describes that people make consumption decisions based on their current and future and past income. As people tend to distribute their consumption over their lifetime. Where in the basic form : [20]

Where is the consumption in given year.

Where is the number of years the individual is going to live for.

Where is for how many more years will the individual be working.

Where is the average wage the Invidia is being paid over his remaining work time

And is the wealth he has already accumulated in his life. [21]

Old-age spending[edit]

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[edit]

References[edit]

  1. ^ Black, John; Hashimzade, Nigar; Myles, Gareth (2009). A Dictionary of Economics (3 ed.). Oxford University Press. ISBN 9780199237043.
  2. ^ Lewis, Akenji (2015). Sustainable consumption and production. United Nations Enviornment Programme. ISBN 978-92-807-3364-8.
  3. ^ Hsiang-Ke, Chao (2007). "A structure of the consumption function". Journal of Economic Methodology. 14: 227–248. doi:10.1080/13501780701394102.
  4. ^ https://www.investopedia.com/terms/c/consumer-spending.asp
  5. ^ https://www.britannica.com/topic/consumption
  6. ^ D'Orlando, F.; Sanfilippo, E. (2010). "Behavioral foundations for the Keynesian Consumption Function" (PDF). Journal of Economic Psychology. 31 (6): 1035–1046. doi:10.1016/j.joep.2010.09.004.
  7. ^ https://journals-scholarsportal-info/pdf/07493797/v44i0002/185_be.xml
  8. ^ "CONSUMPTION GROWTH 101". Archived from the original on 2012-05-06.
  9. ^ Mincer, Jacob (1963). "Market Prices, Opportunity Costs, and Income Effects". In Christ, C. (ed.). Measurement in Economics. Stanford, CA: Stanford University Press.
  10. ^ Becker, Gary S. (1965). "A Theory of the Allocation of Time". Economic Journal. 75 (299): 493–517. doi:10.2307/2228949. JSTOR 2228949.
  11. ^ 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.
  12. ^ https://www.ecnmy.org/learn/your-home/consumption/what-is-consumer-choice-theory/
  13. ^ https://policonomics.com/lp-consumption-2/
  14. ^ https://www.economicsdiscussion.net/income/individuals-choice-between-income-and-leisure-explained-with-diagram/1196
  15. ^ https://www.ecnmy.org/learn/your-home/consumption/what-is-behavioral-economics/
  16. ^ https://authors.library.caltech.edu/22029/
  17. ^ https://corporatefinanceinstitute.com/resources/knowledge/economics/consumption/
  18. ^ https://policonomics.com/consumption/
  19. ^ http://www.scielo.org.pe/scielo.php?script=sci_arttext&pid=S2077-18862017000100006
  20. ^ https://www.jstor.org/stable/40969831?seq=31#metadata_info_tab_contents
  21. ^ https://www.jstor.org/stable/40969831?seq=31#metadata_info_tab_contents

Further reading[edit]

External links[edit]