The theories are presented every time from broad and more interdisciplinary to narrow and more mathematical. The four theories that I like to introduce you to are Social Economics, Institutional Economics, Post Keynesian economics and, at the very end of each topic, Neoclassical Economics, for the special case of ideally functioning markets.
- The Absolute Income Hypothesis: ...
- Relative Income Hypothesis: ...
- The Permanent Income Hypothesis: ...
- Life Cycle Hypothesis:
What are the theory of consumption?
Since consumers and, by extension, economies are risk-averse, consumption theory tells us that they should desire to use financial markets to insure against income risk, thereby smoothing the effects of temporary idiosyncratic fluctuations in income growth on consumption growth.
What are the types of consumption?
4 Types of Consumption in Economics The main types include convenience, shopping, specialty, and unsought consumer goods: Convenience: These goods are frequently consumed and easy to attain.
What are the four factors that affect consumption?
Factors Affecting Consumption Spending | EconomicsThe Rate of Interest: Saving directly depends on interest. ... Sales Efforts: ADVERTISEMENTS: ... Relative Price: Changes in relative price can only shift demand from one product to another. ... Capital Gains: ... The Volume of Wealth:
What are theories of consumption and savings?
Economists have developed three major theories of consumption and saving behavior: (1) The life-cycle hypothesis (Modigliani and Brumberg, 1954; Modigliani and Ando, 1957; Ando and Modigliani, 1963); (2) the permanent income hypothesis (Friedman, 1957); and (3) the relative income hypothesis (Dusenberry, 1949).
What are the 5 types of consumption?
As shown in Figure 1, the theory identifies five consumption values influencing consumer choice behavior. These are functional value, social value, emotional value, epistemic value, and conditional value. A decision may be influenced by any or all of the five consumption values.
What are the 4 types of consumer products?
There are four types of products and each is classified based on consumer habits, price, and product characteristics: convenience goods, shopping goods, specialty products, and unsought goods.
What are the three forms of consumption function?
Consumption function definitionYd = disposable income (income after government intervention – e.g. benefits, and taxes)a = autonomous consumption (consumption when income is zero. e.g. even with no income, you may borrow to be able to buy food)b = marginal propensity to consume (the % of extra income that is spent).
What factors influence the consumption?
consumption function, in economics, the relationship between consumer spending and the various factors determining it. At the household or family level, these factors may include income, wealth, expectations about the level and riskiness of future income or wealth, interest rates, age, education, and family size.
What is the main objective of consumption?
The following points highlight the eighteen main objective factors that influence consumption function according to Keynes. Some of the objective factors are: 1. Change in the Wage Level 2. Windfall Gains or Losses 3.
What is the Keynesian theory of consumption?
Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending—consumption, investment, or government expenditures—cause output to change. If government spending increases, for example, and all other spending components remain constant, then output will increase.
What is absolute theory of consumption?
In economics, the absolute income hypothesis concerns how a consumer divides their disposable income between consumption and saving. It is part of the theory of consumption proposed by economist John Maynard Keynes.
What is modern theory of consumption?
The contemporary theory of consumption was developed independently in the 1950s by Milton Friedman as the permanent theory of consumption, and by Franco Modigliani as the life cycle theory of consumption. ▪ Consumption for a foresighted consumer depends on: – Financial wealth: The value of checking and saving accounts.
What are the three type of consumption?
Consumption and the Business Cycle Private consumption is divided into three categories: Durable goods that are defined as goods with a lifetime greater than three years, services that include travel and car repairs, and non-durable goods such as food and water that can be immediately consumed.
What is consumption and its types in economics?
Consumption is an activity in which institutional units use up goods or services; consumption can be either intermediate or final. It is the use of goods and services for the satisfaction of individual or collective human needs or wants.
What are the 3 types of goods?
Economists classify goods into three categories, normal goods, inferior goods, and Giffen goods.
What are the important of consumption?
Consumption is the end point of production process. The quality and quantity of consumption has impact on the standard of living of people in a society. If the society produces more than it consumes, it can keep the residual portion for investment so that economy continues to grow.
What is the consumption function?
Consumption function presents interesting features. People have unusually high average and marginal propensities to consume, and, therefore, the marginal propensity to save is low, partly on account of low income levels and partly on account of high marginal propensity to consume.
Why is the assumption of a zero marginal propensity to consume out of transitory income questioned?
Similarly, the assumption of a zero marginal propensity to consume out of transitory income is questioned, partly on the basis that low income families are under strong pressures to spend any expected income to meet current needs, and partly because of the very unequal distribution of wealth which mitigates against dissaving by low-income families to maintain consumption in the face of temporary declines in income.
How is RIT different from AIT?
The RIT is fundamentally different from AIT. The RIT explains away the short-run consumption function as a result of temporary deviations in current income, while the AIT explains away the long-run consumption function as the result of factors other than income on consumption.
What is the Duesenberry Hypothesis?
Prof. Duesenberry has made two significant observations on the factors affecting consumption function which go by the name of ‘Duesenberry Hypothesis’. According to him, consumption expenditure of an individual is determined not only by his current income but also by the standard of living enjoyed by him in the past.
What is the life cycle hypothesis?
Life cycle hypothesis is another important attempt to explain the difference between cyclical short-run consumption function and secular long-run consumption function. It has been developed by Franco Modigliani, Albert Ando and later by Brumberg—called the life cycle hypothesis or MBA approach. It is said that life cycle hypothesis is similar to PIH developed by Friedman.
How is consumption expenditure determined?
More specifically, the RIT argues that the level of consumption spending is determined by the household’s level of current income relative to the highest level of income previously earned.
How does life cycle consumption differ from its simple Keynesian counterpart?
The life cycle consumption function that we have derived, differs from its simple Keynesian counterpart because in the life cycle consumption function, consumption is taken as a function of wealth and of age and not simple of current income.
Why is consumption undertheorized?
Because of social theorists’ productivist bias, consumption has been greatly undertheorized, especially by the classical theorists. Further undermining the utility of classical theories is the fact that when consumption was addressed, theorists generally operated with a negative predilection.
How does consumption become an object?
Jean Baudrillard writes in The System of Objects ( [1968] 1996: 200) that ‘to become an object of consumption, an object must first become a sign.’ Thus, to understand consumption, we need to be able to read consumer goods as a series of signs—similar to a language—that requires interpretation. Consumer goods constitute a system of codes that work together so that no particular object can be understood in isolation from the system. But Baudrillard makes it clear that the sign here refers primarily to the flow of difference in the system itself. This would mean, for example, that Veblen’s conspicuous consumption only signifies high or low class as a secondary effect. The primary effect of consumption is simply difference and precisely what that difference is can be added later and changed when necessary. Baudrillard tells us that an object becomes an object of consumption when it is no longer determined by any of the following: (1) its place in the production cycle; (2) its functional use; or (3) its symbolic meaning. It is then that it is ‘liberated as a sign to be captured by the formal logic of fashion’ (Baudrillard, 1981: 67).
What did consumption threaten?
If production contributed to the new social order, consumption appeared to many social thinkers of the day to threaten this order. For example, Weber ( [1904] 1958) saw consumption as a threat to the capitalist Protestant ethics. Durkheim (1964) identified consumption with the society-threatening anomie that could be remedied by the functional interrelations of the divisions of labor found in production. Rosalind Williams (1982: 271) reports that almost all the social philosophers writing about the rise of mass consumption in late nineteenth-century France saw consumption as primarily an individual phenomenon that threatened social order. Even those who saw the potential for consumer solidarity, such as Charles Gide and Gabriel Tarde, noted the corrosive effect of the inherent individualism of consumption (Rosalind Williams, 1982: chs 7, 8).
How do consumption and production create each other?
Production is completed through consumption which creates the need for further production . Conversely, consumption is only created as a material reality through production because the need that impels consumption only becomes concrete in relation to particular objects that have been produced. However, after having shown the complex relationship between consumption and production, Marx ( [1857-58] 1973: 94) closes the section by declaring, without real argument, that ‘production is the real point of departure and hence also the predominant moment.’
Why is consumption considered a negative view?
That view tends to ignore or explain away the pleasurable experiences of the consumer. There are several reasons why this is ultimately an unsatisfactory theoretical position. First, while the sociology of consumption should not pretend to an amoral positivism, it would be better to make consumption the object of moral investigations rather than of moral assumptions. Second, since consumption constitutes such a central, necessary and, for many, pleasurable process in everyday life, the moral tone of sociologists may come across as the ranting of elitist intellectuals about the ‘vulgar’ practices of the common people. Finally, standing up to the ineffectual moral condemnations of experts and intellectuals may be one of the factors that makes unbridled consumption so much fun. In response to the moral denouncements of consumption by many early social theorists, a new image of the consumer has emerged. Rather than being condemnatory, some theorists have attempted to redeem and even celebrate consumption.
What was Marx's main focus?
Most generally, the focus of Marx’s analysis was the capitalist system of production and the fact that it was inherently an exploitative and alienating system.
Why is semiotics useful?
Semiotics has been an especially useful tool for analysing consumer objects as signs (Fiske, 1989; Gottdiener, 1995). When consumer objects are studied as signs, it appears that the object itself does not have intrinsic properties that make it meaningful, since the same objects can carry diverse and even contradictory social messages. According to semiotics, the meaning of the object is its difference from the meanings of other objects and is therefore derived from the system of objects as a whole.
How does utility of a commodity relate to other commodities?
The utility of a commodity in relation to other commodities diminishes as the amount of the stock of that commodity increases. The more of a thing a person possesses the less satisfaction he will derive from having a little more of it. Each successive increment that is added to one’s supply of a commodity yields less satisfaction than the previous unit until eventually satiety is reached.
Why does the consumer buy a commodity?
The consumer buys a commodity because it has utility and he will continue to buy more of that commodity as long as the additional supplies have at least as much utility as have the other things that could be bought with the money represented by their price. When the additional units have less than this utility, the consumer will stop buying; he has reached the margin and will transfer his spending elsewhere.
Why is the law of substitution called the law of substitution?
It is called the Law of Substitution because it enables the consumer to get the maximum amount of satisfaction by substituting goods which give him greater utility for those which give him less utility.
Why is the Law of Diminishing Utility important?
The Law of Diminishing Utility is based on the characteristic that each individual want taken by itself is capable of complete satisfaction. The Law of Equi-Marginal Utility or the Law of Maximum Satisfaction has as its basis the characteristic that wants are competitive.
What are the two types of wants?
Wants are divided into necessaries , comforts and luxuries. Necessaries are articles the consumption of which is necessary for maintenance and increase of efficiency. Comforts are articles, the consumption of which adds to human efficiency but in a less degree than their cost. Luxuries are an article the consumption of which does not add to and even may detract from the efficiency of a person.
What is productive consumption?
If the commodity or service is consumed in order to produce something further, there is productive consumption.
What does it mean to have a scale of preference?
This implies that he has a scale of preference, a kind of list of his unsatisfied wants arranged in order of satisfaction. A commodity near the top of the list would give him more satisfaction that one lower down. Few people are consciously aware of having scale of preferences, though most are aware that some wants are more pressing than others, for the purpose of economic theory.
What is rational optimization?
In their studies of consumption, economists generally draw upon a common theoretical framework by assuming that consumers base their expenditures on a rational and informed assessment of their current and future economic circumstances. This “rational optimization” assumption is untestable, however, ...
What is the permanent income hypothesis?
The permanent income hypothesis omits the detailed treatment of demographics and retirement encompassed in the life-cycle model, focusing instead on the aspects that matter most for macroeconomic analysis, such as predictions about the nature of the consumption function, which relates consumer spending to factors such as income, wealth, interest rates, and the like.
What did Smith believe about the baseline assumptions built into the standard models of consumption?
Smith clearly did not believe one of the baseline assumptions built into the standard models of consumption described above: that the pleasure yielded by a given level of consumption is independent of the consumption standards of the surrounding community. A day labourer in Smith’s time was a consumer of linen shirts for social as well as practical reasons. However, research into the consequences of this type of “comparison utility” suggests that observable individual spending behaviour is much the same whether one cares about absolute or relative levels of consumption, because there is nothing that the typical individual can do to change the consumption levels of others.
Why is observable spending behaviour the same?
However, research into the consequences of this type of “comparison utility” suggests that observable individual spending behaviour is much the same whether one cares about absolute or relative levels of consumption, because there is nothing that the typical individual can do to change the consumption levels of others.
What are the modern versions of the life cycle and permanent income hypothesis?
The modern mathematical versions of the life-cycle and permanent-income-hypothesis models used by most economists bring some plausible refinements to the original ideas. For example, the modern models imply that the marginal propensity to consume out of windfalls is much higher for poor than for rich households.
Why do people have difficulty resisting impulses?
Evidence from experimental psychology suggests that people have difficulty resisting the impulse for instant gratification, even when they agree (at any time other than the exact moment of temptation) that it would be rational to resist. Whether such self-control problems have large economic effects is unclear.
Is there only one way to behave rationally?
The popularity of this assumption reflects the fact that there is usually only one way to behave rationally, but there are a great many possible ways to behave stupidly. In the absence of a general theory of stupidity, economists have been unable to construct a unified, compelling alternative to the rational optimization framework.
What is consumer culture?
Finally, the consumer cultural perspective of consumption is one where the consumer acquires goods and services to satiate ones needs not merely for basic consumption but more towards consumption as an ingrained phenomenon that seeks sensory gratification as an end.
What is consumer society?
We live in a consumer society where the ownership of goods and consumption of services pervades every aspect of our existence. Ever since the global economy began to be integrated and tightly interconnected, consumption of goods and services has been taken to new heights with an accent on owning goods from economic, symbolic and consumer culture viewpoints.
What is the consumer culture aspect of consumption?
Finally, goods acquired as part of the need to consume for the sake of consumption which is associated with mores of the specific population group or the market segment can be said to be the consumer culture aspect of consumption. As opposed to the economic aspect of consumption which is largely concerned with satiating the basic needs ...
What is the motivation for consumption?
In this dimension, the acts of consumption are motivated by a desire to accrue benefits in the form of material gains for satiating the human need for food , clothing, shelter and other aspects concerned with these dimensions.
Why is populist capitalism called populist capitalism?
This is the reason that symbolic aspects of consumption that form part of the marketers strategies are often referred to as “populist capitalism” because of the fact that targeting these needs forms the basis for marketing strategies aimed at satisfying popular notions of class and status.
What is consumption of goods and services?
Consumption of goods and services is a basic act that is performed by all of us whenever we purchase goods and services for personal and professional use. The economic aspect of consumption is the dimension which is concerned with consumption from a purely economic benefit point of view. In this dimension, the acts of consumption are motivated by ...
What is symbolic consumption?
On the other hand, the symbolic perspective of consumption is concerned with the dimension of seeking to consume goods and services from the perspective of acquiring social status and for what can be described as “cool capitalism” where the tendency to belong to a certain group of consumers with the overriding benefit being the value attached to the symbolism of belonging to that group.
What is the main prediction of LCH?
So one main prediction of the LCH is that consumption depends on wealth as well as income, as is shown by the intercept of the consumption function.
What is the saving function of the relative income hypothesis?
The saving function is expressed as S t =f (Y t / Y p ), where Y t / Y p is the ratio of current income to some previous peak income. This is called relative income. Thus current consumption or saving is not a function-of current income but relative income.
When was the Keynesian consumption function confirmed?
Data collected and examined in the post-Second World War period (1945-) confirmed the Keynesian consumption function.
What is the life cycle hypothesis?
The life cycle hypothesis (henceforth LCH) represents an attempt to deal with the way in which consumers dispose off their income over time. In this hypothesis wealth is assigned a crucial role in consumption decision. Wealth includes not only property (houses, stocks, bonds, savings accounts, etc.) but also the value of future earnings.
Why does income vary?
The main reason that an individual’s income varies is retirement. Since most people do not want their current living standard (as measured by consumption) to fall after retirement they save a portion of their income every year (over their entire service period). This motive for saving has an important implication for an individual’s consumption behaviour.
How do people protect their living standards?
People try to protect their living standards either by reducing their past savings. (or accumulated wealth) or by borrowing. However as the economy gradually moves initially into the recovery and then in to the prosperity phase of the business cycle consumption does not rise even if income increases.
What are the four types of consumption hypotheses?
The following points highlight the top four types of Hypothesis in Consumption. The types of Hypothesis are: 1. The Post-Keynesian Developments 2. The Relative Income Hypothesis 3. The Life-Cycle Hypothesis 4. The Permanent Income Hypothesis.
What happens to the average propensity to consume as income increases?
As income increases and a society moves along the same consumption function curve, its average propensity to consume falls. But Duesenberry’s relative income hypothesis suggests that as income increases consumption function curver shifts above so that average propensity to consume remains constant. In Figure 7.1 it will be seen that if points A’ and B’ are joined together, we get, a new consumption function curve C’C’.
How does income affect consumption expenditure?
The relative amounts of income from physical assets (i.e., non-human wealth) and income from labour (i.e., human wealth) also affects consumption expenditure. This is denoted by the term w in the permanent consumption function and is measured by the ratio of non-human wealth to income. In his permanent income hypothesis Friedman suggests that consumption expenditure depends a good deal on the wealth or assets possessed by the people. The greater the amount of wealth or assets held by an individual, the greater would be its propensity to consume and vice-versa.
What is Keynes' theory of consumption?
Since Keynes lays stress on the absolute size of income as a determinant of consumption, his theory of consumption is also known as absolute income theory. Further, Keynes put forward a psychological law of consumption, according to which, as income increases consumption increases but not by as much as the increase in income. In other words, marginal propensity to consume is less than one.
How is consumption determined in one day?
Thus consumption in one day is not determined by income received on that particular day. Instead, it is determined by average daily income received for a period. This is on the line of life cycle hypothesis. Thus, according to him, people plan their consumption on the basis of expected average income over a long period which Friedman calls permanent income.
Which economist propounded that consumption expenditure depends on income of an individual relative to incomes of others?
First, Duesenberry has propounded that consumption expenditure depends on income of an individual relative to incomes of others rather than the absolute size of his own income.
When income of the community increases, relative income remaining constant, the proportion of consumption expenditure to income will not increase much?
When income of the community increases, relative income remaining constant, the proportion of consumption expenditure to income will not increase much because relative incomes of the households remain the same (Note that this implies that saving ratio will not rise much).
What are the three most important theories of consumption?
3 Important Theories of Consumption (With Diagram) The three most important theories of consumption are as follows: 1. Relative Income Theory of Consumption 2. Life Cycle Theory of Consumption 3. Permanent Income Theory of Consumption.
What is the Modigliani theory?
If one allows for borrowing and lending, in a world with complete markets, the Modigliani theory suggests that people would not be constrained by their individual income in any single year. That is, their consumption does not have to match their income in any given year.
What is the essence of Modigliani's theory?
The essence of the Modigliani theory is that in a perfect foresight world, forward looking, rational consumers will match the present value of their consumption to the present value of their income. Next, Modigliani shows that consumers will like to smooth out their consumption.
What are the basic research tasks of consumption and management?
The basic research tasks of Consumption and Management are: to use the Marxism consumption theory to summarize the experience in consumption practice. to make clear the position and functions of consumption in social reproduction. to increase the people’s consciousness to know and use the consumption mechanism and rules.
Why is consumption theory important?
Since consumers and, by extension, economies are risk-averse, consumption theory tells us that they should desire to use financial markets to insure against income risk, thereby smoothing the effects of temporary idiosyncratic fluctuations in income growth on consumption growth.
What is Samuelson's consumption theory?
All in all, Samuelson’s consumption theory is the combination of classical thought and Keynesianism.
How to study consumption theory?
Beginning with the arrow that links households to demand, we now propose studying consumption theory. By considering the goals, constraints, and choices of individual agents it is possible to define their individual demand curves, and then, by summing them horizontally, to define the aggregate demand curve. We will then address the topic of production theory by studying the goals, constraints, and choices of the production units that underlie the definition of their individual supply curves that, summed horizontally, determine the aggregate supply curve ( Chapter 4 ). We will then proceed with the analysis of strategies and constraints underlying companies' labor demand by following along the labor demand curves of individual companies and their horizontal sum aggregation. Studying production requires more in-depth development because it is substantially different from consumption theory. While interactions between individual consumers' choices do not require particular development, interactions between individual producers' choices will require a detailed study of the dynamics of various forms of markets, such as perfect competition, monopolies, and oligopolies, as well as studying the possible complex strategic interactions between production units by using game theory ( Chapters 5–7Chapter 5Chapter 6Chapter 7 ).
What is the difference between economics and natural science?
Modern economic theory recognizes that the central difference between economics and natural sciences lies in the forward-looking decisions made by economic agents. Therefore expectations are a basic building block of economic theories. For example, in consumption theory the paradigm life cycle and permanent income approaches stress the role of expected future incomes. In investment decisions present value calculations are conditional on expected future prices and sales. Equity prices, interest rates, and exchange rates all clearly depend on expected future prices.
