Thursday 29 November 2018

Theory of Consumption

Theory of Consumption. Consumption expenditure comprises government consumption (government consumption) and household consumption (household consumption/private consumption). Factors affecting the magnitude of the household consumption expenditures, among other things:

Economic Factors

  • The four factors that determine the level of consumption, namely:

  • Household Income (Household Income)

Household income is very big its influence on levels of consumption. Usually the better income level, the higher the consumption. Because as income level increases, the ability of households to purchase various needs becomes increasingly large consumption or living patterns may also become increasingly consumerist, increasingly demanding at least a good quality.

The Wealth of the Household (Household Wealth)

Included in the notion of household wealth is wealth rill (homes, land, and cars) and financial (fixed deposits, stocks, and securities). The wealth can increase consumption, due to the increase of disposable incomes.

Interest Rate (Interest Rate)

High interest rates may reduce the desire of consumption. With high interest rates, then the economic cost (opportunity cost) of consumption will increasingly. For those who want to consume with owe first, e.g. by borrowing from bank or using a credit card, interest charges and more expensive, so better put off/reduce consumption.

Estimates of The Future (The Household Expectation About the Future)

The internal factors are used to estimate future prospects among other household jobs, careers and salaries that are promising, many family members who have to work.

While external factors that influenced, among others, domestic and international economy condition, the kinds of economic policies and direction of the running of the Government.

Demographic Factors

The Number of Residents

The total population of which many will enlarge the consumption expenditure, although the average expenditure per person or per family is relatively low. A country's consumption expenditure will be very large, when the population is very much and very high per capital income.

The Composition of the Population

The influence of the composition of the population against the level of consumption, among other things:

  • More and more residents who are working, the greater the level of consumption. Because more and more of the population that worked, earnings also grew.

  • The higher the level of education of the community, the level of consumption also higher, because by the time a person or a family of more and more highly educated then needs his life more and more.

  • More and more people living in urban areas (urban), consumption expenditure is also higher. Because the general pattern urban communities more than consumerist society countryside.

The Non-Economic factors

Factor of non-economic factors that most affect the magnitude of consumption is a factor of social cultural community. For example, changing the pattern of change in eating habits, ethics and values to replicate to other community groups considered more excellent/ideal.

Consumption Model

Disposable Income and consumption Relations

Keynes explained that current consumption (current consumption) were heavily influenced by current income disposable (current disposable income). If the income disposable increased, then consumption will also increase. It's just not the increased consumption of increased income disposable.

C = Co + bYd Ket: C = consumption

Co = autonomous and therefore consumption

b    = marginal propensity to consume (MPC)

Yd = disposable income

0 < b < 1


The Marginal Consume Tendency the trend of consuming a marginal (Marginal Propensity to Consume, abbreviated as MPC) is a concept which gives an overview of the how much consumption will increase when revenue disposable increased by one unit.

MPC   =       C


0 < < 1 MPC


The Trend of Consuming an Average Of

The tendency of taking the average (Average Propensity to Consume, abbreviated APC) is the ratio between the total consumption with the income disposable total.


APC    =      C       Yd

Because of the magnitude of the MPC < 1, APC < 1 then


The relationship of consumption and savings Income disposable household that received most of the used for consumes, while the rest saved. We can also say each additional revenue will be allocated to disposable adding to the consumption and savings. The magnitude of the additional income disposable which became an additional savings account called a tendency saving a marginal (Marginal Propensity to Save/MPS). While the ratio of between the level of savings by income disposable called a tendency saving the average (Average Propensity to Save/APS)



Yd           =  C + S (saving)

MPS = 1 â € "MPC

APS = 1 â € "APC


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