CONCEPT OF CONSUMPTION

  CONCEPT OF CONSUMPTION. Definition of the concept of consumption: first what is consumption?

Does consumption have anything to do with demand and supply? So lets define it in a simple way.

The concept of consumption refers to the utilization, expenditure, or use of goods, services, resources, or any other valuable items by individuals, households, businesses, or society as a whole. It is an essential part of economic activity and plays a significant role in shaping the economy.

Consumption can be broadly categorized into two types:

  1. Personal Consumption: This refers to the expenditure made by individuals or households to satisfy their personal needs and desires. Personal consumption includes a wide range of goods and services such as food, clothing, housing, healthcare, education, entertainment, transportation, and so on. It is influenced by various factors, including personal income, wealth, preferences, cultural influences, and advertising.
  2. Aggregate Consumption: Aggregate consumption refers to the total expenditure on goods and services by all individuals, households, businesses, and government entities within an economy over a specific period. It is a key component of the Gross Domestic Product (GDP), which measures the overall economic output of a country. Aggregate consumption is influenced by factors such as disposable income, savings rates, interest rates, government policies, and overall economic conditions.

The concept of consumption is closely linked to the concept of production, as goods and services are produced to meet the consumption demands of individuals and society.

Consumption patterns can vary across different societies, cultures, and economic systems. In developed economies, consumption is often driven by consumer demand and plays a crucial role in promoting economic growth.

However, excessive or unsustainable consumption patterns can have negative impacts on the environment, natural resources, and overall well-being.

In recent years, there has been a growing emphasis on sustainable consumption, which aims to balance individual and societal needs while minimizing negative environmental and social impacts.

This involves promoting responsible and conscious consumer choices, reducing waste, encouraging recycling and reuse, and supporting the production and consumption of environmentally friendly and socially responsible goods and services.

Types of consumption

Here are a few list of the different types of consumption

Durable goods: This involves consumption expenditure on certain items which are furniture and machine.

Non–durable goods: This involves expenditure on goods that are not durable in nature, e.g. food, clothing and water.

Services: This involves consumption expenditure on general services, e.g. legal fees, entertainment fees and educational fees.

FACTORS THAT DETERMINE THE LEVEL OF CONSUMPTION

Savings: The level of savings influences consumption. High savings tend to reduce the level of consumption.

Level of income: The higher the income the higher the level of consumption.

Availability of credit facilities: Availability of credit facilities either to individuals or firms tends to increase the level of consumption.

Income distribution: Equitable distribution of national income will increase the disposable income of individuals thereby increasing the level of consumption.

Possession of assets: Revenue generated by assets increases the income of their owners and this tends to raise the level of consumption

Rate of taxation: High taxation reduces the income of people and this reduces the level of consumption

Interest rate: If the interest rate received is high, it will generally increase income, thereby resulting in a rise in the level of consumption.

Profit earned: High profits earned either by individuals or firms increase income, thereby resulting in a rise in the level of consumption.

Future expectation: The expectation of a rise in the prices of goods and services will lead to a rise in the level of consumption expenditure and vice versa.

Detailed factors influencing the level of consu

The level of consumption is influenced by various factors that can have both individual and macroeconomic impacts. Here are five key factors that influence the level of consumption:

  1. Disposable Income: Disposable income refers to the amount of money an individual or household has available after deducting taxes. Higher disposable income generally leads to increased consumption as individuals have more financial resources to spend on goods and services. Factors affecting disposable income include wages, salaries, bonuses, government transfers, and taxation policies.
  2. Consumer Confidence: Consumer confidence refers to the perception of individuals or households regarding their current and future economic prospects. When consumers feel optimistic about the economy, job security, and their personal financial situation, they are more likely to increase their consumption. On the other hand, during periods of economic uncertainty or recession, consumer confidence tends to decline, leading to reduced consumption.
  3. Interest Rates: Interest rates have a significant impact on consumption, particularly for big-ticket items like homes and automobiles that are often financed through loans. When interest rates are low, borrowing becomes more affordable, incentivizing consumers to make large purchases and increase their consumption. Conversely, high-interest rates can discourage borrowing and lead to decreased consumption.
  4. Availability of Credit: Access to credit also influences consumption levels. When credit is easily available and interest rates are favourable, consumers are more likely to borrow money to finance their purchases, leading to increased consumption. The availability of credit depends on factors such as banking regulations, lending standards, and the overall health of the financial system.
  5. Demographic Factors: Demographic factors such as age, income distribution, household size, and population growth can influence consumption patterns. For example, an ageing population may have different consumption priorities, such as healthcare and retirement savings, which can affect overall consumption levels. Changes in income distribution can also impact consumption, as different income groups have varying propensities to spend.

It’s important to note that these factors can interact and influence each other in complex ways. Moreover, cultural influences, advertising, government policies, and technological advancements are additional factors that can also play a role in shaping consumption patterns.

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