Consumption - What is it? Determinants, how is it calculated? and more

Consumption

The action of acquiring goods and services to satisfy needs.

What is consumption?

From the macroeconomic point of view, consumption consists of the action of acquiring goods and services to satisfy needs.

A family usually dedicates most of its income to consumption and the rest to savings, which consists of the desire to save part of the production to be consumed in the future, when the funds are needed.

An important concept within the economic analysis of consumption theory is a propensity to consume: the way in which people dispose of their income to satisfy their consumption needs. Since the part of income that is not consumed is saved, a concept intrinsically related to this will be that of the propensity to save.

Determinants of consumption

The marginal propensity to consume and save constitute arithmetical relationships that reflect the portion of disposable income that is allocated to consumption or saving, respectively.

For each level of disposable income, the part that goes to consumption and the part that is set aside in the form of savings will depend on the level of disposable income and the marginal propensity to consume and save.

This is because families do not consume according to their disposable income, but according to their permanent income. In the income received there is a permanent and a random component, the former being the one that determines consumption.

At very low-income levels, consumption can be above the income earned, because you cannot live with that income. This may involve borrowing money, spending savings from other years, or seeking help from the state or charities.

An important factor in the level of consumption is the price variable. If inflation is high and the nominal value of assets does not change, the population will be less wealthy in real terms and, consequently, will consume less. In other words, since inflation erodes much wealth and its value does not rise in price as quickly, families suffer from their loss of wealth by consuming less.

How is consumption calculated?

Consumption depends on national income, that is, on national income, so it can be said that consumption is a function of income. It is expressed as follows:

C =  f (Y)

As a general rule, it is accepted that, in aggregate terms, the household sector does not spend all its income on consumption, but a high percentage of it does, which is known as propensity to consume.

The marginal propensity to consume of a society can be determined by dividing the total consumption expenditure by the level of disposable income.

The marginal propensity to consume is identified as MPC and is calculated as follows:

 

Where (C) represents total consumer spending and (Y) disposable income.

 

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