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Consumption is spending for acquisition of utility as opposed to investing which is spending for acquisition of future income. Consumption is a major concept in economics and is also studied in many other social sciences.
Economists are particularly interested in the relationship between consumption and income, as modeled with the consumption function.
Different schools of economists define consumption differently. According to mainstream economists, only the final purchase of newly produced goods and services by individuals for immediate use constitutes consumption, while other types of expenditure — in particular, fixed investment, intermediate consumption, and government spending — are placed in separate categories (see Consumer choice). Other economists define consumption much more broadly, as the aggregate of all economic activity that does not entail the design, production and marketing of goods and services (e.g. the selection, adoption, use, disposal and recycling of goods and services).
Behavioural economics and consumption
The Keynesian consumption function is also known as the absolute income hypothesis, as it only bases consumption on current income and ignores potential future income (or lack of). Criticism of this assumption led to the development of Milton Friedman's permanent income hypothesis and Franco Modigliani's life cycle hypothesis. More recent theoretical approaches are based on behavioral economics and suggest that a number of behavioural principles can be taken as microeconomic foundations for a behaviourally-based aggregate consumption function.
Consumption and household production
Consumption is defined in part by comparison to production. In the tradition of the Columbia School of Household Economics, also known as the New Home Economics, commercial consumption has to be analyzed in the context of household production. The opportunity cost of time affects the cost of home-produced substitutes and therefore demand for commercial goods and services. The elasticity of demand for consumption goods is also a function of who performs chores in households and how their spouses compensate them for opportunity costs of home production.
Different schools of economists define production and consumption differently. According to mainstream economists, only the final purchase of goods and services by individuals constitutes consumption, while other types of expenditure — in particular, fixed investment, intermediate consumption, and government spending — are placed in separate categories (See consumer choice). Other economists define consumption much more broadly, as the aggregate of all economic activity that does not entail the design, production and marketing of goods and services (e.g. the selection, adoption, use, disposal and recycling of goods and services).
Spending the Kids' Inheritance (originally the title of a book on the subject by Annie Hulley) and the acronyms SKI and SKI'ing refer to the growing number of older people in Western society spending their money on travel, cars and property, in contrast to previous generations who tended to leave that money to their children.
Die Broke (from the book Die Broke: A Radical Four-Part Financial Plan by Stephen Pollan and Mark Levine) is a similar idea.
- Aggregate demand
- Life cycle hypothesis
- Measures of national income and output
- Permanent income hypothesis
- Consumer debt
- Classification of Individual Consumption by Purpose (COICOP)
- Consumer choice
- List of largest consumer markets
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- Ivanova, Diana; Stadler, Konstantin; Steen-Olsen, Kjartan; Wood, Richard; Vita, Gibran; Tukker, Arnold; Hertwich, Edgar G. (18 December 2015). "Environmental Impact Assessment of Household Consumption". Journal of Industrial Ecology. 20 (3): 526–536. doi:10.1111/jiec.12371.
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