Social Studies

Permanent Income Hypothesis- future and expected

Lesson 3: The Concept of Consumption
Circular Flow of the Economy
Economy-composed of two decision-making units
which are the households and the firms
Circular Flow Diagram- used to explain the role of
the household and the firms
income drive consumption; Milton Friedman
Life Cycle Hypothesis- present and future income, as
well as consumption, is a factor of wealth; Franco
Modigliani and Richard Brumberg
Determinants of Consumption
As individuals earn more income, consumption tends
to increase.
Interest Rate- the payment of the use of money;
depositors allow banks to use their money so they get
paid interest in return
Low interest rates discourage saving.
Consumer Expectation- refers to the general outlook
of the future

Consumer Buying Behavior

What is Consumption?
Consumption- purchase of goods and services by the
households for personal consumption; it refers to
consumer spending/expenditure
Classical Interpretation of Consumption-
consumption was the sole end and purpose of
production; Adam Smith
Absolute Income Hypothesis- consumption is
determined by different factors, primarily income;
John Maynard Keynes
Disposable Income- remaining income an individual
has after taxes and other government obligations
Consumer Buying Behavior- founded on the basic
assumption of rationality
Consumer Choice Theory- a concept in
microeconomics which links consumer spending to
personal preferences
Utility- refers to satisfaction
Budget- sets the limit to what the households can buy
given their limited income and wealth
Consumption Trend in the Philippines
Consumer Rights
Rights and Obligations of a consumer

Equation for Disposable Income: Yd = Y – T

Wise Consumption
( Y represents gross income of an individual and T
represents taxes)
Consumption Function- used to support Keynes’
absolute income hypothesis

Equation for Consumption Function:

C = a + bYd

( a represents other factors, b represents MPC, Yd

represents disposable income)
Marginal Propensity to Consume (MPC)- measures
the change in consumption