Consumption in economics

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 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. 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).

Consumption function
In economics, the consumption function describes a relationship between consumption and disposable income. The concept is believed to have been introduced into macroeconomics by John Maynard Keynes in 1936, who used it to develop the notion of a government spending multiplier.

Its simplest form is the linear consumption function used frequently in simple Keynesian models:

C = a + b X Yd

where a is the autonomous consumption that is independent of disposable income; in other words, consumption when income is zero. The term b X Yd is the induced consumption that is influenced by the economy’s income level. The parameter b is known as the marginal propensity to consume, i.e. the increase in consumption due to an incremental increase in disposable income, since . Geometrically, b is the slope of the consumption function. One of the key assumptions of Keynesian economics is that this parameter is positive but smaller than one, i.e. .

Keynes also took note of the tendency for the marginal propensity to consume to decrease as income increases, i.e. . If this assumption is to be used, it would result in a nonlinear consumption function with a diminishing slope. Further theories on the shape of the consumption function include James Duesenberry’s (1949) relative consumption expenditure, Franco Modigliani and Richard Brumberg’s (1954) life-cycle hypothesis, and Milton Friedman’s (1957) permanent income hypothesis.

Some new theoretical works are based, following Duesenberry’s one, on behavioral economics and suggest that a number of behavioural principles can be taken as microeconomic foundations for a behaviorally-based aggregate consumption function.

Development of Consumption
Consumption exists since humanity exists, because goods have always been consumed. In anthropology, all social units of a society in which consumption takes place are referred to as the consumption community. These are primarily the households, in addition clans, village communities, Zweckverbünde. Consumption beyond the budget reinforces the social cohesion of the group.

15th and 16th century
A consumer society (in which consumption in itself is individualized and more important than the social component) developed for the first time in 15th-century England, when, among other things, the emergence of new printing technologies and the cotton trade increased consumption considerably. A consumer society is characterized by the fact that people not only consume or buy what they need to survive, but also the “beautiful” things of life.

18th century
In the 18th century, the population bought what they could not produce themselves at weekly and fairs. There were no fixed prices, it was traded. At first only the nobility cultivated prestige consumption with luxury goods such as fine spices and exquisite fabrics. Over time, the bourgeoisie emancipated and thus its purchasing power grew. Human interest evolved from need to desire. It was consumed to represent something. In the UK, in the early eighteenth century, industry and jobs were created. Due to the associated increase in incomeIn the bourgeoisie, consumer staples increased, such as beer, tea, soap and printed clothing. Fashion magazines were the most successful means of communication for the consumer society and led to an increase in consumer needs. Soon other magazines moved in. In addition to Britain, France, Germany and Holland were influenced by this revolution.

19th century
An innovation in the mid-19th century was the advertising column. It offered a lot of space for advertising and was an important means of increasing sales. Through the development of advertising in newspapers, magazines and shop windows, consumption has steadily increased. The industrialization in Europe and North America created complex production, transport and information networks. At the end of the 19th century, the first consumer houses were built, which were characterized by fixed prices. Increased supply increased consumer desires and consumerism.

20th and beginning of the 21st century
The economic miracle and the associated mass consumption began with the reconstruction after the Second World War. The luxury goods mentioned above became mass-produced goods. International goods also came on the market in the 1950s and globalization of consumption began. The market for electrical appliances boomed in the 1960s and in the 1970s the market for plastic furniture, precious raw materials and energy sources. In the 1980s, developed a kind of luxury addiction. Wealth and beauty became more important. The World Wide Webdevelops an innovative dimension of consumption. This made it possible to order directly from the producer in other countries. Consumption became a leisure activity for many people. “The Federal Association of the German mail order assumed that the consumers in Germany spent 16.8 billion euro in 2007 for purchases on the Internet – tendency rising.”

Another current trend is the politicization of consumption. In doing so, companies try to supplement and enhance their products with a political dimension (greenwashing campaigns such as the beer brewery Krombacher’s 2008 rainforest project), the media draw attention to the political consequences of certain consumer behavior and NGOs call for a certain consumption or boycott behavior on (as in the shell boycott, 1995).

Many studies emphasize the impact of global consumption on climate change. The Worldwatch Institute has in the report State of the World 2010 (State of the World Report 2010) suggests that global consumption “climate killer number one” was. For example, if all earthlings live like the Americans, the planet could feed only about 1.4 billion people (rather than over $ 7 billion today).

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
Aggregate consumption is a component of aggregate demand.

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).

Consumption can also be measured by a variety of different ways such as energy in energy economics metrics.

Old-age spending
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.

Economic Vision
Aggregate consumption according to National Accounting
The vision and standards are those set by the national accounts. This distinguishes between final consumption and intermediate consumption (or ” productive consumption “).

Final consumption
It corresponds at the national level to the quantity of goods and services used which contribute to the direct satisfaction of individual and collective needs.

Meeting the needs of individual human
It is the final consumption of households or private consumption which includes:

All expenditures that allowed the acquisition of goods and services (merchant or non-market) to satisfy their individual needs.
The total expenditure for goods and services resulting from a production intended for own final use (domestic services…).
Self – consumption, when households consume what they produce themselves, even partially (in traditional agriculture see the case of food agriculture).
Note: The satisfaction of these individual needs can be achieved through a collective organization. see for example the cases of

consumption of goods and services that can not be offered by private organizations on the market: Thus National Defense and Justice are collective services.
consumption of goods and services that are offered in parallel on the market: For example: public or private education, public hospitals or private clinics.
Note 2: In national accounts,

housing purchases by households are accounted for as capital expenditures
the fact that an owner occupies his dwelling results in the finding of a supply of service to himself

Satisfaction of collective needs
Collective consumption comprises the consumption of administrations).
Final consumption of NPISHs: This corresponds to non-market social transfers intended for households.
Productive consumption
According to the national accounts, it is divided into 26 equal parts, coordinated and repetitive, adjacent to the fact that we can live in community:

intermediate consumption: productive consumption contributing to the production of other goods (or services) and defined as: ” Value of goods (other than capital goods) and market services consumed during the period in the current process of production “.
Example: Yeast and flour are intermediate goods used in bread making
consumption of fixed capital, which is equal to the value of economic depreciation (ie the depreciation of fixed capital in the period considered)
Example: the baker’s oven damping means that every time the oven is used, a portion of the value of this equipment is transferred to the bread baked there.
Note: In National Accounts, only goods and services produced may be consumed. We do not consume natural resources such as air, or factors of production such as land or labor.

The act of consumption from the point of view of the households

The link between income and expenditure
Consumption, as an economic function by households, is part of the general economic cycle (Production → Income → Debt → Currency Creation → Expenditure).

It depends on monetary factors (disposable income, budget, purchasing power…)
with as resources:
the revenues collected
the money they can borrow (especially through Consumer Credit)
the one they can withdraw from their heritage (dissaving)

with as expenses:
their consumption
their taxes
their loan repayments
their savings constitution. (Note in passing that savings can be destined for consumption deferred in time)

Their investments (real estate or other).

It also depends on non-monetary factors:
attitudes, behaviors, experiences and skills with regard to money.
expectations of future income
different expectations at the beginning or end of the career (income expected to increase or stagnate or even decline in the event of retirement)
prospects for maintaining purchasing power (especially during inflationary periods and depending on whether one holds fixed or variable incomes)

general confidence in the future: the evolution of consumption is a key element of the economic situation.

Structure of consumer expenditure
It is highly dependent on socio-cultural and psychological data: From one country to another, differences in the structure of consumer spending demonstrate this.

However, it is an old law stated by the statistician Engel who says that ” the budgetary coefficient measuring the share of food in the budget decreases as income increases.”

The act of consumption from the perspective of Keynesian
The consumption function according to the Keynesian perspective
To consume, economic agents, especially households, must have an income.

The gross disposable income:
Primary income: Households perceive different elements that constitute their primary income:
for employees: net wages of social contributions,
for the self-employed and the liberal professions: mixed income BIC / BNC / BA (industrial and commercial / non-commercial or agricultural profits)
for the owners of wealth: the property income (dividends, interest and rents).
Transfer income: This is the difference between the payments made by the State (social benefits) and the payments made by it (direct taxes).

The addition of Primary Income and Transfer Revenues gives Disposable Income: this is the total resources available to households to consume or save.

The consumption function

Household consumption behavior is determined primarily by the decision to share between current consumption and future consumption (savings).
Keynes assumes that consumption has a primary importance in the allocation of income: it is a function of disposable income, namely: C = c (Yd) + Co.

It is a behavioral equation that defines household consumption (C). it is the marginal propensity to consume, it is the proportion in which the consumption varies when the income varies by one unit. Yd is disposable income, that is, net income. Co refers to the incompressible consumption of households, that is to say what they consume even when their income is zero (to meet the physiological needs…).

Propensity to consume, Propensity to spare
Keynes notes that as income rises, savings opportunities increase. Due to the relative saturation of needs, the propensity to consume (defined as the ratio between consumption and income, C / R) tends to fall and, symmetrically, the propensity to save tends to increase.

However, he argues that in the short term, the propensity to consume and the propensity to save depend on more sociological rather than economic parameters. This leads to the conclusion that they remain relatively stable. And so the level of consumption will depend more on the variation of income (income seen in terms of real availability and not in terms of nominal gross income).

Reviews of the Keynesian consumption
This approach is called into question by Milton Friedman’s work published in 1957 in The Theory of the Consumer Function.

While Keynesianism dominated, Friedman points out the imperfections and formulates to replace the permanent income hypothesis.

It postulates that consumption choices are guided not by current incomes but by consumers’ expectations of their incomes. Anticipations even more stable, they tend to smooth consumption, even if there is a variation in disposable income (upwards or downwards). This work was particularly noted because it invalidated the conjunctural policies for stimulating demand and the Keynesian investment multiplier.

Ecological Vision
In ecology (that is, as a science of ecosystems in biology, not to be confused with ecologism), consumption refers to the assimilation, ingestion or use by an organism of natural resources. Consumption almost always leads to the appearance of waste. When many organisms consume in the same place, the ecosystem where consumption takes place accumulates waste. This waste can sometimes serve as a resource for one or more other organisms. In cases where the biogeochemical cycle is interrupted, ecological problems appear leading to the collapse or imbalance of the ecosystem.

Sociological vision
The sociology considers consumption as an essential act of life in society, particularly in the context of Consumerism. It studies consumption from an angle that may be non-financial, including the reasons for consumption, influences, the use of consumed goods and services, and their symbolic role.

Philosophical Vision
Philosophy poses the question of consumption from a moral point of view.

Religions generally have a relatively distanced or even critical view of consumption, which represents an attachment to the material goods of the world, and thus risks, in their eyes, diverting man from other values.

In Judaism, the Sabbath economy and the lessons of the manna brought by God during the Hebrew crossing of the desert (picking only what is needed, not making reservations) were also interpreted as calls to moderation of consumption.

For the Roman Catholic Church, the episcopal synod that followed Vatican II declared that the philosophical cause of the consumer society was an excess of immanentism, that is to say a form of sensualism focused exclusively on material life. This form of materialism is related to an interpretation of Spinoza’s teaching.

In Buddhism, the goal of Man is to attain Nirvana, which is characterized by the liberation of all material desire, source of suffering, fusion through meditation in a spiritual All that makes the person disappear and the end of cycle of reincarnations. These objectives appear contradictory with a consumption of goods and services going beyond what requires the maintenance in form of the human person.

Legal vision: the law of consumption
Even if the greatest economists (Adam Smith or Jean-Baptiste Say in particular) agree to make the consumer the first recipient, and even “the sole purpose of any production”, it was not until the 1960s to see appear, little After the rise of the American consumerist movement, not only consumer protection laws but also, in a few years, a new branch of law: the law of consumption.

Guiding Principles: There is a United Nations General Assembly Declaration, known as the UN Guiding Principles for Consumer Protection (1999, UNCTAD). These guiding principles set out the rights of consumers, inspire the main legal principles which, from now on, organize the law of consumption and impose themselves on professionals:

General obligation of information
General security obligation
General obligation of conformity
General obligation to compensate for injury
General obligation of loyalty and balance in contracts

These obligations, of public order, weigh on both companies and public authorities.

Origins: It is not disputed that “L’École de Montpellier” (a university research center) and its founder, Mr. Jean Calais-Auloy (professor emeritus) is at the origin of this new branch of law, in France, in Europe and even in the world. Other European academics (Norbert Reich in Germany, Ewoud Hondius in the Netherlands, Geoffrey Woodroffe in the UK, etc.) have contributed to the “Europeanization” of the subject which, though still bearing the mark of “Montpellier method” is essentially shaped by texts (directives and regulations) of Community origin.

Domain – content: Formed between the end of the 1970s and the beginning of the 2000s, consumer law is not yet well defined and questions still remain: should we include real estate issues? Can legal persons, professionals, use it to defend themselves?

Whatever the case may be for specialists, the Montpellier School integrates:

The rules relating to products (food and non-food) and consumer services (banking, insurance, transport, etc.),
The rules relating to marketing (advertising, sales promotion) and contracts concluded by the consumer (canvassing, distance selling, unfair terms, guarantee, credit, etc.),
Sanctions of previous rules (criminal or civil), legal actions, including those exercised by consumer associations (collective actions and class action project) and issues of over-indebtedness.

Objectives – Effects: The purpose of consumer law is, on the one hand, to protect the weak part of the contract (public policy of protection) and, on the other hand, the overall balance of the market economy and relations Competitive (public economic order), because the consumption representing 75% of the demand (and thus of the GDP) it is essential that it plays its role of a fluid and symmetrical way. That is why, even if some business circles question it for the sake of form, the law of consumption is not only an essential subject but also an autonomous branch of law.

The recent subprime crisis in the United States, entirely due to the lack of legal rules and, in particular, consumer law, provides a scathing denial to those who have easily reduced the constraints. As for the companies, they apply the law of the consumption to not be sanctioned and integrate in the cost price – and thus the selling price finally supported by the consumer – the additional cost that the respect of these rules imposes on them.

However, the considerable volume of these consumer protection laws imposes on companies a cumbersome management that leads them to use the services of specialized lawyers and adapted management.

Sources, texts, Code: The law of consumption can have a national origin (less and less, except sanctions), European (more and more, except sanctions) or even, rather rarely, international. Some countries have adopted a completely new Code (Brazil, which was inspired by the “Calais-Auloy draft code”), which is a simple but useful compilation of existing texts, in a supposedly practical order. Thus the French Code of consumption (but also Italian…). However the method of the compilation induces difficulties of application because these texts, coming from different times, reveal gaps, obscurities, redundancies or even contradictions.

The instruments of European origin, which now constitute the majority of the body of texts, also reveal, especially when they emanate from Directives and not from Regulations, the same difficulties, the latter further complicating the difficulties of national law.

The Montpellier School has proposed not only a new, coherent French code, but also a European code (preferably, for tactical reasons, limited to European cross-border litigation only).

Training – Research: There is, in France – and even it seems in Europe – only one training for lawyers specialized in consumer law (at the University of Montpellier), including large companies, firms, administrations, consumer associations, now need.

In consortium with the Universities of London-Brunel, Barcelona, Bologna-Rimini and Timisoara, the Consumer Law Center of Montpellier now offers, since October 2009, under the impetus of the European Commission, a bilingual training, under fivefold seal, the European Master in Consumer Affairs, more oriented towards the management of consumption.

Consumer research continues around the world and China is starting to take an interest in it because consumption rules can, in perfect conformity with those of the WTO, lead to the rejection, withdrawal, recall of non-compliant goods. The United Nations (UNCTAD, UNIDO, FAO, WHO) are trying to coordinate both research and reflection and action (adoption in the last countries that do not yet know).

The debate about consumption

The indictment of consumption
The progress of consumption in the developed countries would have resulted in constituting a real “consumer society”. In this perspective, consumption crystallizes a critical vision of modern capitalist and media society. The short term, the notion of image and possession, advertising and media noise would be erected into new values, to the detriment of human beings, social relations and ecology.

Criticism of the consumer society
For authors like Jean Baudrillard, the consumer society designates a social and economic order based on the systematic creation and stimulation of a desire to buy in ever larger quantities of goods and / or services. To do this, the design of goods produced would tend to make them very specific, less durable (planned obsolescence) and their forced sale through excessive promotion, advertising or retention efforts. Thus supply would have come to dominate the demand and even the simple morality.

Other critical analyzes
In classical and especially Marxist theory, consumption is directly correlated and therefore dependent on the level of disposable income,
Analysis of the phenomenon of mass consumption, with its immaterial determinants (consumption as a factor of identity, the influence of advertising and the media),
the conspicuous consumption of Thorstein Veblen,
the symbolic domination of Pierre Bourdieu,
“frugal” consumption: Some surveys relativize the postulate of the classical theory according to which consumption and quality of life are linked. According to the Ipsos Institute Trend Observer 2008 survey, six out of ten French people agree that ” to improve the quality of life, it is necessary to reduce consumption “.

The defense of consumption
An axis of defense of consumption, is based on the idea that it is a natural and inevitable evolution of societies, resulting from technical progress as well as widespread enrichment. From the point of view of microeconomics, this defense postulates that a growing consumption is the fruit of the natural desire for material well-being of each individual.

The defense of consumption is also based on the idea that this individual decision, selfish in principle according to the term used in the sociology of consumption, resulted in the general enrichment of society. Consumption creates and maintains employment, rising standards of living, innovation and human creativity, and so on. In this perspective, phenomena condemned by classical morality – waste, superfluity, ephemeral, exploitation and redundancy – are in fact drivers of economic development and innovation.

From a moral point of view, the search for the superfluous would even be one of the characteristics that would distinguish the human being from the animal, limited in its expectations, needs, desires and aspirations.

The consumer society has also been presented as a positive element from a moral point of view as opposed to other social models. The quest for material goods and their possession to channel human passions in areas from which violence (at least physical) would be excluded. Moreover, the citizens of consumer companies would be less inclined to desire war given what they would have to lose (property, standard of living).

The movements that seek to rationalize consumption practices
There are also movements that try to change consumer practices: fair trade, collaborative consumption, group purchases of vegetables from the harvester, barter.

To a greater extent, policies promoting organic products, waste sorting and less polluting transport also fall into this category. We are talking about responsible consumption, whose impact on ecosystems would be less important. There are also consumer protection associations.

Some sites are engaged in defending rooted consumption (local, regional or national). The companies that still produce in France are listed, the topics related to the manufactured in France are widely discussed, and exchanges between professionals or individuals are facilitated.

The criticism of the consumption is realized on several levels which sometimes lead to confusion:

The defense of the consumer, the consumerism, which does not affect the consumption itself, but wants to strengthen the consumer’s power with producers and distributors.
Criticism of a consumption which is not attentive to the modes of production or the consequences of the production of the good consumed. It leads to the development of the concepts of solidarity consumption (which primarily helps small producers), sustainable consumption (which does not harm the environment), citizen consumption, etc.
It is in this perspective that consom’action (neologism) or responsible consumption is a recent sociocultural phenomenon, mainly in “alternative” environments. It expresses the idea that you can “vote with your caddy” by choosing who you give your money, choosing to consume not only consumerist, but taking into account the “sustainable development”.

Criticism of overconsumption in terms sometimes used, or even the principle of material consumption itself. Hence movements, of consumption, of voluntary simplicity, attitudes of asceticism with religious motivation or not, etc.

Source from Wikipedia