Consumption

Updated on January 25, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Consumption Meaning

Consumption is drawing benefits from a resource, product, or service. An individual consumes a product or service to fulfill needs or attain satisfaction. The consumption volume regulates the supply and demand for products and services in an economy.

Consumption

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The study of buying behavior is quintessential in economics. The study estimates poverty levels and the average spending of each household. These values are used to determine a country’s gross domestic product (GDP). Consumption levels also signify a nation’s standard of living.

Key Takeaways

  • Consumption is the use of goods, products, or services. It is the sole purpose behind manufacturing.
  • There are five main types of purchase—direct, productive, wasteful, quick, and slow.
  • Consumer spending plays a crucial role in a nation’s economic growth. Increased spending triggers a subsequent increase in demand, manufacturing, and employment.
  • The price of goods and services regulates consumption levels. If consumers cannot afford it, they skip many of their purchases.

Consumption In Economics Explained

Consumption is the basis of any economic or human activity. It is simply the act of using or drawing benefits from a resource, product, or service to fulfill a need or to attain satisfaction. As long as there is consumption, business activities, and companies will continue.

Consumption is the beginning and the end of any business activity in a society. Even if an individual tries to consume less, they still have to indulge in basic food and shelter. This is known as autonomous consumption.

Governments try to attain the right balance between excessive consumer saving and excessive spending. If there is less consumption, supply is more, but demand is less. This can lead to inventory losses. At the opposite end of the spectrum, overconsumption can lead to the depletion of crucial resources.

Economists study a nation’s consumption and analyze the buying behavior of regular households. This way, they can point out factors that influence consumer spending. It is a major component in deriving the GDP of a nation. Government authorities generally impose a tax on purchases through tariffs, excise duty, and sales taxes. Taxation is further divided between local and state jurisdictions. In a way, the quantity of purchases determines how much citizens contribute to the economy.

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Factors

Consumption factors are as follows.

#1 – Family Size

When studying a regular household, family size denotes the number of purchases a family makes for utilities, resources, and different types of goods and services. The larger the family, the larger the purchase.  

#2 – Age

When we compare a single product, age becomes critical. This is because many products specifically target a section of a population and, in most cases, a specific age bracket. Even otherwise, growing children consume more than average quantities of food. Similarly, an old or weak person might consume less than a regular person.

#3 – Education

Education constitutes the psychological factor that impacts buying behaviors. An educated person is expected to have a comparatively rational approach toward the purchase—they are more likely to put needs ahead of wants. Also, intellectual pursuits create demand for specific products and services—books, podcasts, nebula, curiosity stream subscriptions, etc.

#4 – Employment

An employed person is more likely to budget their purchase. On the other hand, an unemployed person has lesser purchasing power. During an economic recession, overall market demand decreases. Economic growth is the polar opposite—employee wages rise—demand and sales rise.

#5 – Interest Rates

Interest rates regulate capital markets—influence banks and financial products. If interest rates are high, people may not invest in a new home. They cannot afford credit cards or loans.

Types

Now, let us look at consumption types.

#1 – Direct

It refers to the activity of purchasing goods and services or making use of natural resources for final purchase. It includes buying from stores, hotels, cafes, medicines, or cutting down a tree to light a fire for heat. Simply put, goods or services are purchased for immediate fulfillment of needs.

#2 – Quick

Quick purchases refer to goods that last for a short time. For example, perishable food and FMCG products. These products are usually consumed only once.

#3 – Slow

It is the opposite of immediate purchase. Slow consumption comprised durable goods—cats, buildings, land, etc. These purchases are usually more expensive than quick consumption purchases.

#4 – Productive

It can also be called indirect purchase; goods and commodities in this category are utilized to make another product—to complete a sSo, form. For example, we use cotton to make clothes, plastic to make utensils, and wires in electronic appliances.

#5 – Wasteful

It refers to items that create substantial waste during or after purchase. They are generally designed to fulfill a particular need and either become useless or leave a high residual of waste after utilization.

Examples

Let us look at consumption examples to understand the concept better.

Example #1

Let us consider a nuclear family; John lives with his wife, Gwen. They have two children—Jason and Bella. The family’s monthly budget accounts for groceries, electricity bills, streaming services, a Wi-Fi connection, and fuel. In addition, the family organizes a tea party and throws a barbeque twice a month.

In this way, every family accounts for individual purchases and total purchases. The change in the price of goods and services will alter some of the expenses.

Example #2

In January 2023, the French government reduced its power purchase for the winter. In addition, the French power grid operator has regulated its electricity usage. As a result, France witnessed low consumer demand and increased production from nuclear and hydropower sources.

The power grid operator announced they are in total control of the means to avoid power cuts—demand fell 9% below the five-year pre-pandemic average.

Europe’s energy supply crisis was brought out by the Russia-Ukraine conflict. In early 2022, the French government ran a massive campaign encouraging citizens to consume less energy.

Importance

  • Consumption is eventually the final activity of the manufacturing process.
  • It signifies the lifestyle and standard of living of people.
  • Without demand, there is no need for manufacturing or services.
  • Governments make policies based on total purchases—GDP.

Consumption vs Consumerism

  • Consumption is an economic activity, whereas consumerism is a phenomenon.
  • Consumption does not have to involve consumerism. In contrast, consumerism includes consumption.
  • Purchases are made for needs and requirements; on the other hand, consumerism refers to the tendency to buy more (excessive spending).
  • Demand and purchase are considered positive. On the contrary, consumerism is often considered a negative aspect.

Frequently Asked Questions (FAQs)

How does income affect consumption?

Every individual spends according to their budget. The individual’s income dictates their purchasing power. If the product is not affordable, the consumer might let it go.

What is the consumption function?

If C denotes consumer spending, A denotes autonomous consumption, M denotes marginal propensity to consume, and D denotes real disposable income. The following equation depicts the mathematical relationship between consumption and gross national income:
C = A + MD

How does price impact consumption?

Several factors affect buying behavior and are directly or indirectly linked to each. For example, the price of a product or service is a major component of whether a consumer is willing to pay for it. In most cases, price is also a driving point when comparing two similar products.

This has been a guide to Consumption and its meaning in economics. We explain its examples and comparison with consumerism, factors, types, and importance. You can learn more about it from the following articles –

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