Consumption is an essential economic activity. The quantity and quality of consumption determine the standard of living of the people. Consumption is the act of satisfying one’s wants. Consumption is defined as “the use of goods and services for satisfying wants”. In economics, consumption is studied both at micro level and macro level.
Consumption, defined as spending for acquisition of utility, is a major concept in economics and is also studied in many other social sciences. It is seen in contrast to investing, which is spending for acquisition of future income.
Different schools of economists define consumption differently. According to mainstream economists, only the final purchase of newly produced goods and services by individuals for immediate use 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 is the beginning of economic science. In the absence of consumption, there can be no production, exchange or distribution. Consumption is also an end of production. Producers produce goods to satisfy the wants of the people.
Keynesian Theory and Real Income
One of the most popular and well-known theories is the Keynesian theory, offered by economist John Maynard Keynes. This theory states that current real income is the most important determinant of consumption in the short run. Simply said, you spend according to how much income you have coming in. This is the basis for most consumption theory.
The term ‘real’ that is used in describing income refers to how your income is affected by inflation, or the natural rise in prices of goods and services. So to elaborate, if your income went up five percent in a year, but the price of goods or inflation went up five percent also, your real income remained flat. You can’t really buy or consume any more goods than you could before.