Understanding Consumption AP9

Consumption

The act of using goods and services to satisfy needs and wants.

Classical Interpretation of Consumption

People consume based on their income and needs; higher income → higher consumption.

Absolute Income Hypothesis

Spending depends directly on current income.

Disposable Income

Income left after paying taxes; can be spent or saved.

Consumption Function

Shows the relationship between income and spending.

Permanent Income Hypothesis

People base spending on long-term expected income, not just current income.

Life Cycle Hypothesis

People plan consumption across their lifetime: spend more during working years, less in retirement.

Marginal Propensity to Consume (MPC)

How much additional consumption happens if income increases by 1 unit.

Determinants of Consumption

Income, interest rate, consumer expectations.

Consumer Choice Theory

Consumers aim to maximize satisfaction (utility) within budget, with full information and consistent preferences.

Diminishing Marginal Utility

The more a good is consumed, the less additional satisfaction is gained.

Consumption Expenditure

Spending by households on goods and services (food, housing, transport, etc.).

Government Expenditure

Spending by government for public goods/services (roads, schools, healthcare).

Right to Safety

Consumers must be protected against harmful goods.

Right to be Informed

Consumers have access to accurate information about products.

Right to Choose

Consumers have the freedom to select from different products.

Right to be Heard

Consumers can voice concerns and complaints.

Wise Consumption

Compare products, read terms, check quality, claim receipts, minimize waste (reduce, reuse, recycle).