PAPER

MACRO ECONOMICS
THEORY OF CONSUMPTION

ECONOMICS INTRODUCTION

GROUPS 5 A:
KHOIRUN NISA ALFITRI (1510631020122)
DIMAS WILLY PRAYOGA (1510631020064)
NIA DARNIA (1510631020160)

MANAGEMENT
FACULTY OF ECONOMIC AND BUSINESS
SINGAPERBANGSA KARAWANG OF UNIVERSITY

Jl. HS. Ronggo Waluyo, Teluk Jembe Timur, Karawang Jawa Bawat
41361

PAPER
MACRO ECONOMICS
THEORY OF CONSUMPTION

ECONOMICS INTRODUCTION

GROUPS 5 A:
KHOIRUN NISA ALFITRI (1510631020122)
DIMAS WILLY PRAYOGA (1510631020064)
NIA DARNIA (1510631020160)

MANAGEMENT
FACULTY OF ECONOMIC AND BUSINESS
SINGAPERBANGSA KARAWANG OF UNIVERSITY

Jl. HS. Ronggo Waluyo, Teluk Jembe Timur, Karawang Jawa Bawat
41361

PREFACE

Frist of all, we praised to Allah SWT for His loves and graces for us. Thanks
to Him for helping us and giving us the chance to finish this assignment on time.
And we would like to say thank you to Mr. Abdul Yusuf S,E M.M as the lecturer
who always teaches us and gives us much knowledge about the Economics
Introduction field.
This paper is made to fulfill Economics Introduction assignment. We
composed this paper with various references of the books and although website
(Wikipedia encyclopedia) and cooperation from each member of the group, so we
can complete this paper. For that, we would like to say thank you for everyone who
helped us in making this paper.
However, we realize this paper is not perfect yet, we will so glad to receive
the suggestions and criticism about this paper, and we hope this paper can give a
lots of advantages for readers. Thank you.

Karawang, November 24th, 2015

Author

ii

CONTENT

Cover ................................................................................................................ i
Preface .............................................................................................................. ii
Content ............................................................................................................. iii
CHAPTER I: INTRODUCTION ................................................................. 1
A. Background ................................................................................................ 1
B. Problem Formulation ................................................................................. 2
C. Paper Purpose ............................................................................................. 2
D. Benefits ...................................................................................................... 2
CHAPTER II: BACKGROUND THEORY ............................................... 3
1

Theory of J.M Keynes ................................................................................ 3

Theory life cycle hypothesis ...................................................................... 3

Theory of Consumption Fisher ................................................................. 4

Permanent Income Hypothesis................................................................... 5

CHAPTER III: CASE DISCUSSION .......................................................... 6

1. What is the consumption ............................................................................. 6
2. The relationship between the consumption with income ............................ 6
2.1 propensity to consume and save .......................................................... 6
i. propensity to consume ..................................................................... 6
a. Marginal propensity to consume (MPC) ................................... 6
b. Average Propensity to Consume (APC) .................................... 7
c. Example calculate MPC & APC ................................................ 7
ii. prospensity to save ......................................................................... 8
a. Marginal propensity to save (MPS) ........................................... 8
b. The average propensity to save (APS) ....................................... 8
c. Example of calculating the MPS and APS ................................ 9
2.2 The relationship between the inclination to consume and save .......... 9
i. MPC + MPS = 1 ............................................................................. 9
ii. APC + APS = 1 ............................................................................... 9

iii

3. The consumption function .......................................................................... 10

4. Saving function ........................................................................................... 11
5. Factors that affect the level of consumption .............................................. 11
a. Economics factor ................................................................................... 11
1. Household income ............................................................................ 12
2. Household wealth .............................................................................. 12
3. The number of durable consumer goods in the community ............. 13
4. Interest rate ........................................................................................ 13
5. The Household expectation about the future .................................... 14
6. Government policy reduces the interest income distribution ........... 14
b. Demographic Factors (population) ........................................................ 15
1) Population ......................................................................................... 15
2) The composition of the population ................................................... 16
3) Factor economics .............................................................................. 17
CHAPTER IV: CLOSING ........................................................................... 18
A. Conclusion ............................................................................................... 18
B. Suggestion ................................................................................................ 18
C. References ................................................................................................. 18

iv

CHAPTER I
INTRODUCTION

A. BACKGROUND
Broadly, the definition of the term takes consumption of two different
languages, is derived from the consumption of the Netherlands and the United
Kingdom language consumption, which means activities that aim at reducing
or spending power to a body, either in the form of goods or services, to meet
the needs that are important or just purely pleasure and satisfaction in time
instantly.
In fact humans have instincts to meet the needs and desires to make a
living. The things that are included in the consumption of very diverse. One
of them is the activity of buying any goods and services. This consumption
activities are created due to someone who is in the process of production or
manufacture. Vice versa, the production activities there because the person
who conducted the activities of over consumption of these products. Then it
can be said that the activities of consumption is very closely related to the
production activities. This activity aims to obtain satisfaction and extended
our reach the level of prosperity in the sense of fulfilled a wide range of needs
of both secondary needs, luxury goods, as well as the physical and spiritual
needs. To be able to consume, a person must have an income. big nothingness
of one's income is very determining levels of consumption
The current economic growth is based on consumption because of the
role of sector investment and exports propel economic growth. Background
to the issues that have been described previously, the compiler will try to
explain what is included in the theories of consumption.

A. PROBLEM FORMULATION
1. What is meant by consumption?
2. What is the relationship between the consumption with income?
3. Describe the function of consumption?
4. What Factors affect consumption?
5. What are the cornerstone of the existing theories in consumption?

B. PAPER PURPOSE
This paper we arrange for:
1. Understand what is meant by consumption
2. Find out the relationship between the consumption with income
3. Figure out what function the consumption
4. Find out what are the factors that affect consumption
5. Know the consumption theory based on experts

C. BENEFIT
Term paper writing is expected to be a source of additional information and
for students of Economics and Business in particular. Compiler expects this
paper can be an exposure that is easy to understand and can help in the
implementation of the completion of tasks in business economics and
management majors in particular, besides it can know the theory of
consumption and can display them in the life of a day today

CHAPTER II
BACKGROUND THEORY

1. THEORY OF J.M KEYNES

Keynes in the 1930s made three assumptions about the theory

of consumption. First he assumed that the marginal propensity to consume,
namely the number of consumed of each additional dollar is between zero and
one. This explains the assumptions at the time of a person's income the
higher the higher consumption and his savings.
The second is the ratio of keynes's theory of consumption against income,
called

tendency

to

consume

on

average

(APC)

down

when incomes rise. According to keynes, the proportion of rich

people's savings are greater than the poor. If ordering from the very
poor to rich people will look the proportion of savings against the increasing
income.
Finally, the income is an important determinant of consumption and the
interest rate does not have an important role. This is in contrast with the
classical economists assume the higher interest rate then it will push the level
of savings and reduce consumption.
2. THEORY LIFE CYCLE HYPOTHESIS

Ando, Brumberg, and Modigliani (18th century) has a hypothesis that socioeconomic factors one can affect the person's consumption patterns. They divide
three parts consumption patterns based on the age of a person as in the graph
below.

Graphic of cycle life

Part

is

age

up

to

t0 ,

person experiencing the dissaving where

people don't have an income but have
to consume. Age t0 to t1, people still
do dissaving because consumption greater
than revenue. Part II is the age up to t1 t2, a
person experiencing saving where income is
greater than consumption. For part III is
the age of the t2 return, where people do dissaving. It's not enough to
mention generate income sufficient to cover expenses.
Function

consumption

of

this

theory is C =aW
a is the MPC whose value depends on the age, taste, and the interest rate, while W is
affected by the present value of earnings from wealth, present value of earnings
from work, retribution and the present value of the expected wage earners received a
lifetime.
Specifically the function consumption as follows:

Where C is consumption spending, a is the MPC, A is the wealth, YL is income

from work, YLE is the expected lifetime earnings since this year, and T is the rest
of a person's age is calculated from the current.
4. THEORY OF CONSUMPTION FISHER
The consideration is done one to make consumption based on the conditions
at the moment and the conditions at the moment to come. Where both of these
conditions will determine the amount of how much income will be saved, as well
as how much revenue will be expelled or spent for the purposes of consumption.

5. PERMANENT INCOME HYPOTHESIS

M Friedman (1957) explains, the behavior of consumption by using
permanent income hypothesis. In whose hypotheses, people's income can be
differenciated into two permanent income and income in the meantime. Permanent
income is income expected people to continue to survive in the future. While
revenue is part of the revenue is not expected to continue to survive. The value of
this income is sometimes positive and sometimes negative.
The size of the revenue itself is a summation and permanent income and
income while or mathematically written:
Y = Yp + Yt
Where Y is income that is measurable, permanent, income is the Yp and Yt is
temporary income.
To that, Friedman argued that consumption should depend on the income of
the permanent, because consumers use a savings and loan to launch a consumption
in response to changes in income in the meantime. So the function of the
consumption according to Friedman is as follows:
C=YP
Where is a constant measure of permanent income part consumed

.CHAPTER III
CASE AND DISCUSSION

A. WHAT IS THE CONSUMPTION

consumption is an activity that aims to reduce or spending power to an
object in the form of goods and services to meet the needs. However, when
translated into macro-economic explanations, the consumption is classified
into household consumers, the purchase of goods or services with the aim
to meet the exact requirement or make purchases based on revenue held or
acquired. When the consumption activity that does not spend all the revenue
generated, then the rest of the money is called savings. If the consumption
expenditures of all people in a country are summed, the result is a society of
consumption expenditures of the State concerned.
B. THE RELATIONSHIP BETWEEN THE CONSUMPTION WITH
INCOME
2.1 propensity to consume and save
i. propensity to consume
ii. propensity to save
i. PROPENSITY TO CONSUME
a. Marginal propensity to consume (MPC)
is a concept which gives an overview of some consumption
will increase if disposable incomes increased by one unit. Can
be defined as the ratio between the increase in consumption ( )
block, performed with increasing disposable income (Yd)
acquired
0MPC1

MPC =

means, an additional amount of consumption will not be

greater than the additional disposable income, so the MPC
figures will not be greater than 1. Figures MPC also not possible
negative, whereby if the disposable income continues to rise,
consumption continued to decline to zero (no consumption).
b. Average Propensity to Consume (APC)
Is the ratio between the total consumption of the total
disposable income. Can be defined as the ratio between the level
of consumption expenditure (C) with the level of disposable
income on consumption when it is done (Yd).
MPC <1, then the APC> 1.

APC =

c. Example calculate MPC & APC

MARGINAL AND AVERAGE CONSUMPTION PROPENSITY
Dispisable

Consumption

Marginal Propensity

Average Propensity

Income

Expenditures

Consumption

Consumption

( )

(C)

(MPC)

(APC)

Example 1: MPC FIXED

Rp 200 ribu

Rp 300 ribu

300/200 = 1,50

Rp 400 ribu

Rp 450 ribu

150/200 = 0,75

450/400 =1,125

Rp 600 ribu

Rp 600 ribu

150/200 = 0,75

600/600 = 1,00

Rp 800 ribu

Rp 750 ribu

150/200 = 0,75

750/800 = 0.9375

Example 2: MPC MORE SMALL

Rp 200 ribu

Rp 300 ribu

Rp 400 ribu

Rp 460 ribu

300/200 = 1,50
160/200 = 0,80

460/400 = 1,15

Rp 600 ribu

Rp 610 ribu

150/200 = 0,75

610/600 =1,017

Rp 800 ribu

Rp 750 ribu

140/200 = 0,70

750/800 = 0,9875

The results of the counting of the MPC are shown

in column 3 while counting results of the APC is shown
in column 4. From example 1 and 2 can be seen that the
APCchangeable value, and value the longer lower. When
smaller than C, then the greater of 1 APC (= Rp 200 thousand,
C = Rp 300 thousand, then APC = = 1.5). And if it is greater
than C (= Rp 800 thousand, C = Usd 750 thousand, then APC
== 0.9375), the APC is smaller than 1.

ii. PROSPENSITY TO SAVE

a. Marginal propensity to save (MPS)
Can be defined as the ratio between the increase of savings
(S) with increasing disposable income ( ). MPS values can be
calculated by using the formula:

MPS =

b. The average propensity to save (APS)

Shows a comparison between savings (S) with disposable
income ( ). APS value can be calculated using the formula:

APS =

c. Example of calculating the MPS and APS

MARGINAL AND AVERAGE SAVING PROPENSITY
Disposable

Consumption

Income

Expenditures

Savings

Marginal Propensity

Average Propensity

Saving

Saving

( )

(C)

(S)

(MPS)

( APS )

Example 1 : MPS FIXED

Rp 200 ribu

Rp 300 ribu

Rp 100 ribu

100/200 = -0,50

Rp 400 ribu

Rp 450 ribu

Rp 50 ribu

50/200 = 0,25

50/400 = -0,25

Rp 600 ribu

Rp 600 ribu

Rp 0 ribu

50/200 = 0,25

0/600 = 0

Rp 800 ribu

Rp 750 ribu

Rp 50 ribu

50/200 = 0,25

50/800 = 0,0625

Example 2 : MPS MORE HIGH

Rp 200 ribu

Rp 300 ribu

Rp 100 ribu

100/200 = - 0,50

Rp 400 ribu

Rp 460 ribu

Rp 60 ribu

40/200 = 0,20

- 60/400 = - 0,15

Rp 600 ribu

Rp 610 ribu

Rp 0 ribu

50/200 = 0,25

- 10/600 = - 0,017

Rp 800 ribu

Rp 750 ribu

Rp 50 ribu

60/200 = 0,30

50/800 = 0,0625

MPS calculation results described in column 4. While in column 5 shows

the calculation to obtain the value of APS. From calculations using formula
APS = S / Y can see that the APS is even greater if disposable income increases.
At first negative, because of households' savings scraping "or" dissaving ".

2.2 The relationship between the inclination to consume and save

i. MPC + MPS = 1
In each MPC and MPS value, ie whether the value is fixed
or changed, MPC + MPS will always equal one.
ii. APC + APS = 1
In each value of APC and APS, namely whether the value is
fixed or changed, APC + MPS will always equal one.

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Has explained that disposable income will be the same as

household consumption coupled with household savings. In the
equation:

= C + S

Yd = disposable income
C = Consumption of households
S = Savings of households

3. THE CONSUMPTION FUNCTION

is a curve that describes the nature of the relationship between the
level of household consumption in the economy with the national
income (or disposable income) of the economy. Consumption function
is a function that shows the relationship between consumption (C)
income (Y).

C = a + bY

C = the level of national consumption

a = household consumption during zero income
b = marginal consumption propensity (MPC)
Y = the level of national income

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4. SAVING FUNCTION
Is a curve that describes the nature of the relationship between
the level of household savings in the economy with the national income
(or disposable income) of the economy.

S = -a + (1-b) Yd

S = the level of household savings

a = household consumption during zero income
b = marginal consumption propensity (MPC)
Yd = disposable income

5. FACTORS THAT AFFECT THE LEVEL OF CONSUMPTION

Many

factors

influence

the

magnitude

of consumption expenditure of households, these factors can be classified

into three factors:

a. Economic factors
b. Demographic factors (population)
c. Non economic Factors

a. Economic Factors
The

four

factors

that

consumption are:
1. Household income
2. Household wealth

determine

the

economic

levels

of

12

3. The amount of consumer goods durable in the community

4. Interest rate
5. Household expeclation about the future
6. the Government's policy of reducing inequality and income
distribution

1. Household income
Household income level are large in affect of its influence on
consumption, usually the more good (high) level of income,
the higher the rate of consumption. Because the income
level

increases.

The

ability

of

the

number

of households will need to buy more, or perhaps the patterns of

life would be
More consumerist. At least the increasingly demanding the
best quality. An example is the father's income is very
low, usually selected rice for consumption is also a type of rice
with low or medium qualities, the giant dish any salted
fish that cheesy. May also be a means of television at home is
black

and

white,

otherwise

if

the

father can sufficient income will be able to purchase

the rice quality and means that is in their house shall be
fulfilled in accordance with what they wants.

2. Household wealth
Covered in terms of household income is real wealth (for
example is a House, land, car), and financial (fixed
deposits, shares, and it is valuable), such wealth can increase
consumption, because of the added income of disposabel, for
example,

the

deposit

interest

received

each

month

and dividends received each year to supplement the household

13

income.

Likewise,

rent.

Earnings

above

of

wages.

Of

used

as

House,

land,

referred
the

consumption,

to

car

asincome

income

for
instead

will

surely

this

be
will

issue consumption expenditure.

3. The number of durable consumer goods in the community

Community expenditure is also influenced goods consumer
goods

durable.

Its

influence

on

the

level

of consumption is positive (increase) and negative (reduce). In

aircraft, the more tv there is in society, then it will reduce
the people went to watch the movies (particularly in
the transport and meals). But a growing number of
available vehicles cars and motorcycles, it will be more
and more expenditure to buy gasoline, or repairs, food and so
on.
Stuff the old stuff is usually expensive, and to get it takes
time for saving. If the purchase in cash then it should be a lot
of saving (consumption is reduced). But if you buy it on
credit then the time saving is when buying goods.

4. Interest rate
High interest rates may reduce or dismiss the desire of
consumption, whether viewed from the side of the family that
owns the excess money or by a lack of money. With the
high price level then, economic costs of consumption will be
more

expensive.

For

those

who

like

to

eat

with

the debtor, usually by borrowing to banks or put on a credit

card. Interest expense is getting expensive, so better
to postpone or reduce consumption. As well as those who
have a lot of money. High interest rates cause the

14

retention money in the bank will be more profitable, rather

than spend the money to consume. If low interest rates,
which would otherwise occur. For the rich, money in the
bank

led

to

storage

cost

consumers

even

greater delays. While for under privileged families the cost

of borrowing which became the lower will boost the courage
and passion of consumption.

5. The Household expectation about the future

If the household estimates the future better, they
will freely do consumption tends to be binding. If the
household estimates the future grew ugly, they will getting the
preparations for issuing the consumption
Internal factors are used to estimate the future prospects of
households among others are: whether the father and mom sure
would get job? What is the career and their salaries will
increase. How many family members who have and will work?
How much is the salary or their income? While the factors that
influence the prediction of external households in the
future

include

the

condition

of

the

domestic

international economy, the kind of type and direction

of economic policy of the Government on the run.

6. Government

policy

reduces

the

interest

income

distribution
On the face of it has been put forward that the MPC on the
high income group lower in the MPC's appeal in a low-income
community groups. The Government's desire to reduce
inequality in the distribution of income turns out will cause the
increase of spending on consumption of society as a whole.
For example Rp.100 million drawn in the Government in the

15

form of community in the form of tax high income brackets

(with MPC amounting to 0.65) will cause a decreased their
consumption as much as Rp65 million, however, the extra
income as much as $ million it received for low-income
community groups (in the form of transfer payment of
subsidies), will lead to their increased consumption spending
as much as Rp80 million (because the MPC they amounted to
0.8), thus it appears that the same national consumption
activities Community consumption, usually become greater
than before, because the policy of the Government doing the
redistribution of national income

b. Demographic Factors (population)

Included in the factors of population is the number and
composition of the population:
1) Population
The total population of which many will enlarge the
consumption expenditure, although the average income per
person is low. For example, although the level of the
Community consumption of Indonesia is lower than
Singapore's population, but in absolute levels of spending
on consumption of Indonesia is greater, when the
population more and more and the number of capita higher
than Singapore. Because the population of Indonesia fifty
times bigger than Singapore. Household consumption
levels will be even greater. A country's consumption
expenditure will be even greater.

16

2) The composition of the population

The composition of the population of a country can
be seen from some of the classification, including: age
(productive and unproductive), education (low, high, and
natural), and area of residence (urban, rural). The influence
of the composition of the population against the level of
consumption of the simple as outlined below:
a. More and more residents who are working or
productive age (15-64 years), the greater the level of
consumption, especially when most of them had the
opportunity to work on high, with a reasonable wage or
better. Because the more people work, earnings are also
getting bigger
b. The higher the educational level of the community, the
level of consumption is also higher. Because by the
time a person or a family is the more highly educated,
needs his life more and more. They should fill no
longer just needs to eat and drink, but also information
needs, the Association for a better society as well as the
need for the recognition of other people against its
existence. Often the costs incurred to meet this need is
much greater than the cost of fulfillment to eat and
drink
c. The more people living in urban areas, consumption
spending is also high. Because the general pattern of
urban community life more consumptive than rural
communities

17

C. factors non economy

The noneconomic factors that 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 fabulous (ideal type). The most concrete
example in Indonesia is a change in the habits of shopping
from traditional article to the grocery store. Similarly, the
eating habits of eating food provided the mother at home
become a habit of eating in the restaurant or hawker centres
that provide fast food. Likewise, the home is not just a shelter
from the heat and rain, but rather the expression of the self.
Not surprising when there are households that spend hundreds
of millions, even billions of dollars, just to buy a dream house.
In the real world, it's hard to sort through and choose what
factors affect what, thus precipitating the change/increase in
consumption. Because the three factors above are closely
interrelated and mutually influenced. Therefore, when just
happen in a low-income community groups that impose to buy
goods and services that are in fact not in accordance with its
ability. The attitude may be due to the influence of the rich
group of life that they watch on television.

CHAPTER IV
CONCLUSION AND SUGGESTION

A. CONCLUSION
1. Consumption is spending on goods and services made by households with the
intention to meet the needs of the person doing the spending.
2. The greater a person's income, the more the level of consumption as well, and
the level of savings will increase. Vice versa, if the level of income a person
gets smaller, then the entire revenue is used for consumption so that the savings
rate of zero. Describes the nature of the relationship between the level of
household consumption in the economy with the national income (or
disposable income) of the economy.
3. Factors affecting the amount of household consumption expenditure, among
others : Economic factors, Demographic Factors, Non-Economic Factors
4. Theory-theory of consumptions are :

Theory J.M Keynes

Theory of Life Cycle

Theory Consumption Fisher

Theory Permanent Income

B. SUGGESTION
We make this paper so that readers can better understand the macro-economic
consumption and can implement sciences contained. The paper is structured
sourced from books of basic economics.
We are sorry if there are deficiencies, therefore the compiler requires criticism
and suggestions for improvement of this paper. Hopefully this paper can be useful
for the reader.

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