Meaning of Consumption: Measurement on household spending on goods and services.
Why is consumption realted with income?
Because the factors that influence consumption is so intertwined income, The functional relationship between consumption and income is called consumption function (or propensity to consume). Consumption is related to income. Simply put, consumption function means proportion of income spent on consumption goods.
Consumption is major concept in economics and is also studied by many other social sciences. Economists are particularly interested in the relationship between consumption and income, as modeled with the consumption function. Income is by far an important factor that determines the necessity tendency for people to consume. In economic ethics, as consumers should pay attention to correct the level of income. If insufficient or low incomes, the consumption of goods to be adjusted, not to the consumption of goods is higher than the revenue that will occur debt. As income rises or falls, consumer spending also rises and falls. The figures given in the future show changes in consumption caused by the increase in revenues (with no change in the trend of consumption) and changes in consumption caused by changes in consumption trends (with no change in income).
Consumption Function:
Consumption function shows relationship between consumption of households by disposable income an economy.
C = a bYd
C = consumption
a = autonomous consumption
b = MPC
Yd = disposable income
Law of Consumption:
When income low, their consumption also low but when income high, consumption also high. Therefore, law of consumption has positive relationship.
Autonomous Consumption
The minimum level of consumption that would still exist even if a consumer had absolutely no income.
Average Propensity to Consume (APC)
Average propensity to consume (APC) is the percentage of income spent. To find the percentage of income spent, we need to divide consumption by income
APC = consumption (C )/ income(Y)
Marginal Propensity to Consume (MPC)
Marginal propensity to consume is the relationship between a change in income and corresponding change in consumption.
MPC = Change of consumption (∆C) / change of income (∆Y)
Determinants of Consumptions
1. Disposable income (Yd) @ income (Y)
In general, household consumption is depending in their disposable income. If disposable incomes increase, household consumption will increase too. This disposable income counted after tax deduction.
2. Interest Rate and Loan Condition
When interest rate in the market was decrease, borrowing cost would become cheaper. As such, consumption spending in country would be higher. Consumption spending will also increase if loan condition charged by banks very loose. So, the consumer easy to get the loan and it will increase the total consumptions.
3. Government Policies
Through fiscal policy, if governments reduce tax its will reduce commodity prices. So, the disposable income will increase and these further encourage total consumption.
4. Hire Purchase and Credit Facilities
If easy for someone to get debt facility, it can increase consumption. In this concept, society use concept “buys now and pays later". Example; credit card.
5. The Invention of New Goods
The invention of new goods was coming into market to replace old commodities. For example color TV replacing black and white TV, the level of consumption is expected to rise.
• Who are the actors?
A) The Private Sector
Buyers and sellers of goods and services and resource owner are linked together in an economy and accross economies. For every rupiahs someone spends, someone else receives a rupiah as income.
1. Households
A houeholds consist of one or more person who occupy a unit of housing. The unit of housing maybe a house, an apartment, or even a single room, as long as it constitutes separate living quarters. A households may consist of a single person, related family members, like a father, mother and children, or it may comprise unrelated individuals, like three college students sharing appartment. The person in whose name the house or appartment is owned or rented is called the households.
2. Business Firms
A business firm is a business organization controlled by a single management. The terms company, enterprise, and business are used interchangeably with firm. Firms are organized as sole proprietorship, partnerships or corporation
3. The international sectors
Economic conditions in the US affect condition throughout the world, and conditions in other parts of the world have a significant effect on economic conditions in the US
B) The Public Sector
The public sector is usually composed of organizations that are owned and operated by the government. This includes federal, provincial, state, or municipal governments, depending on where you live. Privacy legislation usually calls organizations in the public sector a public body or a public authority.
Source: William Boyes & Michael Melvin (Maroeconomics) 2016, page 66
