Economic Concepts & Models Codexery

Consumption (economics)

Use of resources to fulfill present needs and desires.

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Consumption is the use of resources to satisfy present needs and desires, in contrast to investing for future income.[1] Mainstream economists define consumption as only the final purchase of newly produced goods and services by individuals for immediate use.[2] Other economists define consumption more broadly as all economic activity except the design, production, and marketing of goods and services.[2]

Quick Facts

Field
Economics

Facts from the source article.

Key facts and history

The life-cycle hypothesis was published by Franco Modigliani in 1966, describing how people distribute consumption over their lifetime based on past, current, and future income.[3] The Permanent Income Hypothesis distinguishes between permanent income and transitory income, with changes in each having different impacts on consumption.[4] If transitory income changes, the increase is distributed over the remaining lifespan.[4] In most countries consumption is the most important part of GDP, usually ranging from 45% to 85% of GDP.[5]

Keynes's 1936 work, The General Theory of Employment, Interest, and Money, marked the first appearance of the consumption function.[6] The consumption determinants emphasized by Keynes, Duesenberry, and Friedman are, respectively, absolute income, relative income, and permanent income.[7] In 1949, James Duesenberry put forward the Relative Income Hypothesis, which rests on the premise that individuals' consumption choices are interdependent.[8] A change in permanent income (Y_p) leads to a consumption change equal to the marginal propensity to consume (α) multiplied by that change.[4]

Aggregate demand includes aggregate consumption as one of its components.[9]

What the cited sources add

Neoclassical economists view consumption as the final purpose of an economic activity, making per person value an important factor in determining productive success.[10] According to economist Adam Smith, "Consumption is the sole purpose of all production."[10] Consumption expenditure in the private sector accounts for two-thirds of the Gross Domestic Product.[10] Private consumption is divided into durable goods, services, and non-durable goods.[10]

Behavioral economics conducts psychological experiments to understand how people make economic decisions, contradicting Consumer Choice theory.[11] One finding from behavioral economics is that choices are shaped largely by how they are presented, rather than by what they actually are.[11] Behavioral economics increases the explanatory power of economics by providing it with more realistic psychological foundations.[12]

References

  1. Wikipedia, "Consumption (economics)" (CC BY-SA 4.0), which cites: "The Penguin Dictionary of Economics, Eighth Edition", Penguin Books, 2011, p. 71; Black, "A Dictionary of Economics", Oxford University Press, 2009 (original not read by us) en.wikipedia.org
  2. Wikipedia, "Consumption (economics)" (CC BY-SA 4.0), which cites: Lewis, "Sustainable consumption and production", United Nations Environment Programme, 2015 (we also read that source) en.wikipedia.org
  3. Wikipedia, "Consumption (economics)" (CC BY-SA 4.0), which cites: Modigliani, "The Life Cycle Hypothesis of Saving, the Demand for Wealth and the Supply of Capital", Social Research, 1966, p. 160–217 (original not read by us) en.wikipedia.org
  4. Wikipedia, "Consumption (economics)" (CC BY-SA 4.0), which cites: MANKIW, "MACROECONOMICS", Worth Publishers, 2009 (we also read that source) en.wikipedia.org
  5. Wikipedia, "Consumption (economics)" (CC BY-SA 4.0), which cites: "Consumption as percent of GDP around the world"; "Final consumption expenditure (% of GDP)", World Bank Open Data (original not read by us) en.wikipedia.org
  6. Wikipedia, "Consumption (economics)" (CC BY-SA 4.0), which cites: Keynes, J. M. (1936). The general theory of employment, interest, and money. (original not read by us) en.wikipedia.org
  7. Wikipedia, "Consumption (economics)" (CC BY-SA 4.0), which cites: Keynes, J. M. (1936). The general theory of employment, interest, and money.; Duesenberry, J. S., Income, Saving and the Theory of Consumer Behaviour. Cambridge: Harvard University Press, 1949; Friedman, Milton (1957). "The Permanent Income Hypothesis" (PDF). A Theory of the Consumption Function. Princeton University Press. ISBN 978-0-691-04182-7. (we also read that source) en.wikipedia.org
  8. Wikipedia, "Consumption (economics)" (CC BY-SA 4.0), which cites: Duesenberry, J. S. Income, Saving and the Theory of Consumer Behaviour. Cambridge: Harvard University Press, 1949 (original not read by us) en.wikipedia.org
  9. Wikipedia, "Consumption (economics)" (CC BY-SA 4.0), which cites: "CONSUMPTION GROWTH 101" (original not read by us) en.wikipedia.org
  10. "Consumption – Definition, Neocllasical Economics, Importance". facts only, no text reused. corporatefinanceinstitute.com
  11. "What is 'behavioral economics'?". facts only, no text reused. ecnmy.org
  12. "Advances in behavioral economics", Princeton University Press, 2003, p. 1–61. facts only, no text reused. authors.library.caltech.edu

Each numbered sentence above was checked against the source it cites before publication. Sentences citing Wikipedia adapt text from the English Wikipedia article Consumption (economics) (contributors), used under CC BY-SA 4.0; this entry is available under the same licence. Other sources were used for facts only; no text or images are copied from them.

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Sources

Compiled from Wikipedia and the sources listed below. Text from Wikipedia is available under CC BY-SA 4.0; this entry is adapted from it.

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