- It is use of goods and services that satisfy immediate human wants.
- It is the act of making use of goods and services that satisfy immediate needs.
The goods are meant for current consumption (personal use); and they don’t assist in the production of other goods and services. That is, they are not capital goods but consumer goods either durable or non-durable consumer goods.
The following are some of the factors that determine people’s level of consumption
- Size of income: This is the major factor that determines the level of consumption. The higher the level of income, the higher the consumption expenditure. A sudden increase in income may bring about a rise in the level of consumption; while a great fall in income reduces consumption expenditure.
- Government policy: Government policy of compulsory saving, like NPF, Pension and Housing Saving Schemes, reduce the level of income and a fall in consumption expenditure.
- Taxation: The higher the rates of taxes, the lower the level of consumption as taxes reduce people’s income and firms’ profits. However, some governments eliminate or reduce taxes among the poor; and new companies are exempted from payment of profit tax.
- Subsidy: The higher the level of subsidy on goods and services, the lower the cost and prices of the goods. This raises level of consumption.They also raise the level of subsidy of essential commodities. These have the effects of raising the general level of consumption.
- Interest rate – level of saving: The higher the rate of interest, the higher the level of saving, and the lower the amount of money that will be devoted to consumption.
- High propensity to save: Some people are very frugal; i.e. they don’t spend money foolishly or they spend as little as possible. They have high propensity to save irrespective of the rate of Interest; this reduces consumption expenditure.
- Redistribution of income: The equitable (even) distribution of income; that is, giving more to the poor than the rich, raises the general level of consumption in a society.
- Level of credit facility: Availability of credit facilities, e.g. trade credit, especially from retailers to final consumers raises level of consumption. While low level or absence of credit facilities reduces it.
- Level of economic activities and profit: (Boom and Slump): The higher the level of economic activities like during inflation (boom), the higher the level of profit, employment, income and consumption.
- Presence of social security: Availability of social security scheme, like pension and other government guaranteed security schemes, e.g. old people’s home makes people to be sure of good standard of living during old age. This reduces level of saving; and it raises level of consumption
Propensity to consume (PC)
It is eagerness or strong desire to consume. It is the inclination or urge of individual to consume. High propensity to consume is a high desire or much eagerness to consumer; while a low propensity to consume is a low urge to use consumer goods.
Types of propensity to consume There are two major types of PC:
- Average Propensity to Consume (APC).
- Marginal Propensity to Consume (MPC).
1) Average propensity to consume (APC)
- APC is the proportion of one’s income that is spent on consumption.
- It is amount consumed divided by income.
Calculation of APC
2) Marginal propensity to consume (MPC)
- It is the additional consumption that occurs as a result of increase in income.
- Simply, it is a change in consumption (ΔC) as a result of a change in income (ΔY).
- It is a change in consumption divided by a change in income.
Calculation of MPC
This implies that after the calculation of MPS or MPC. you should subtract it from 1 to obtain the other variable. If MPS is given (known) and MPC is unknown, you should subtract MPS from ‘l’ (one) to obtain MPC. Similar approach should be adopted (used) to know either APS or APC.
It is a table that shows consumption expenditure at different levels of income. It is obtained from the assumption that consumption expenditure equals current income minus saving. It is shown in table 2 given below.