Consumption (economics)
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In Keynesian economics consumption refers to personal consumption expenditure, i.e., the purchase of currently produced goods and services out of income, out of savings (net worth), or from borrowed funds. It refers to that part of disposable income (income after taxes paid and transfer payments received) that does not go to saving.
John Maynard Keynes developed the idea of the consumption function, which sees a consumption as consisting of two main parts:
- Induced consumption refers to increases in consumer spending that occur as disposable income rises. Increases in consumption follow the famous marginal propensity to consume. An increase in disposable income leads to an increase in consumption, moving along the consumption function in a graph.
- Autonomous consumption refers to consumption spending done as part of long-term plans for the future (smoothing out income fluctuations, providing for retirement and other expected future events, etc.) and as a result of habits and contractual commitments. Changes in plans, expectations, habits, etc. leads to shifts of the consumption function in a graph.
Often, as in the permanent income hypothesis, the word "consumption" refers instead to the benefit received from consumer goods and services (as opposed to the amount spent on such products).