Consumption Meaning

Consumption is drawing benefits from a resource, product, or service.

An individual consumes a product or service to fulfill needs or attain
satisfaction. The consumption volume regulates the supply and demand
for products and services in an economy.

The study of buying behavior is quintessential in economics. The study

estimates poverty levels and the average spending of each household.
These values are used to determine a country’s gross domestic
product (GDP). Consumption levels also signify a nation’s standard of
living.
 Table of contents

 Consumption Meaning
o Consumption in Economics Explained
o Factors
o Types
o Examples
o Importance
o Consumption vs. Consumerism
o Frequently Asked Questions (FAQs)
o Recommended Articles

Key Takeaways
 Consumption is the use of goods, products, or services. It is the sole
purpose behind manufacturing.
 There are five main types of purchase—direct, productive, wasteful,
quick, and slow.
 Consumer spending plays a crucial role in a nation’s economic growth.
Increased spending triggers a subsequent increase in demand,
manufacturing, and employment.
 The price of goods and services regulates consumption levels. If
consumers cannot afford it, they skip many of their purchases.

Consumption In Economics
Explained
Consumption is the basis of any economic or human activity. It is
simply the act of using or drawing benefits from a resource, product,
or service to fulfill a need or to attain satisfaction. As long as there is
consumption, business activities, and companies will continue.

Consumption is the beginning and the end of any business activity in a

society. Even if an individual tries to consume less, they still have to
indulge in basic food and shelter. This is known as autonomous
consumption.

Governments try to attain the right balance between excessive

consumer saving and excessive spending. If there is less consumption,
supply is more, but demand is less. This can lead to inventory losses.
At the opposite end of the spectrum, overconsumption can lead to the
depletion of crucial resources.

Economists study a nation’s consumption and analyze the buying

behavior of regular households. This way, they can point out factors
that influence consumer spending. It is a major component in
deriving the GDP of a nation. Government authorities generally
impose a tax on purchases through tariffs, excise duty, and sales
taxes. Taxation is further divided between local and state
jurisdictions. In a way, the quantity of purchases determines how much
citizens contribute to the economy.

Factors
Consumption factors are as follows.

#1 – Family Size
When studying a regular household, family size denotes the number
of purchases a family makes for utilities, resources, and different types
of goods and services. The larger the family, the larger the purchase.
#2 – Age
When we compare a single product, age becomes critical. This is
because many products specifically target a section of a population
and, in most cases, a specific age bracket. Even otherwise, growing
children consume more than average quantities of food. Similarly, an
old or weak person might consume less than a regular person.

#3 – Education
Education constitutes the psychological factor that impacts buying
behaviors. An educated person is expected to have a comparatively
rational approach toward the purchase—they are more likely to put
needs ahead of wants. Also, intellectual pursuits create demand for
specific products and services—books, podcasts, nebula, curiosity
stream subscriptions, etc.

#4 – Employment
An employed person is more likely to budget their purchase. On the
other hand, an unemployed person has lesser purchasing power.
During an economic recession, overall
market demand decreases. Economic growth is the polar opposite—
employee wages rise—demand and sales rise.

#5 – Interest Rates
Interest rates regulate capital markets—influence banks and financial
products. If interest rates are high, people may not invest in a new
home. They cannot afford credit cards or loans.

Types
Now, let us look at consumption types.

#1 – Direct
It refers to the activity of purchasing goods and services or making use
of natural resources for final purchase. It includes buying from stores,
hotels, cafes, medicines, or cutting down a tree to light a fire for heat.
Simply put, goods or services are purchased for immediate fulfillment
of needs.

#2 – Quick
Quick purchases refer to goods that last for a short time. For example,
perishable food and FMCG products. These products are usually
consumed only once.

#3 – Slow
It is the opposite of immediate purchase. Slow consumption
comprised durable goods—cats, buildings, land, etc. These purchases
are usually more expensive than quick consumption purchases.

#4 – Productive
It can also be called indirect purchase; goods and commodities in this
category are utilized to make another product—to complete a sSo,
form. For example, we use cotton to make clothes, plastic to make
utensils, and wires in electronic appliances.

#5 – Wasteful
It refers to items that create substantial waste during or after purchase.
They are generally designed to fulfill a particular need and either
become useless or leave a high residual of waste after utilization.
Examples
Let us look at consumption examples to understand the concept
better.

Example #1
Let us consider a nuclear family; John lives with his wife, Gwen. They
have two children—Jason and Bella. The family’s monthly budget
accounts for groceries, electricity bills, streaming services, a Wi-Fi
connection, and fuel. In addition, the family organizes a tea party and
throws a barbeque twice a month.

In this way, every family accounts for individual purchases and total
purchases. The change in the price of goods and services will alter
some of the expenses.

Example #2
In January 2023, the French government reduced its power purchase
for the winter. In addition, the French power grid operator has
regulated its electricity usage. As a result, France witnessed low
consumer demand and increased production from nuclear and
hydropower sources.

The power grid operator announced they are in total control of the
means to avoid power cuts—demand fell 9% below the five-year pre-
pandemic average.

Europe’s energy supply crisis was brought out by the Russia-

Ukraine conflict. In early 2022, the French government ran a massive
campaign encouraging citizens to consume less energy.
 Importance
 Consumption is eventually the final activity of the manufacturing
process.

 It signifies the lifestyle and standard of living of people.

 Without demand, there is no need for manufacturing or services.

 It is the basis of many macroeconomic and microeconomic theories.

 Governments make policies based on total purchases—GDP.

Consumption vs Consumerism
 Consumption is an economic activity, whereas consumerism is a
phenomenon.
 Consumption does not have to involve consumerism. In contrast,
consumerism includes consumption.
 Purchases are made for needs and requirements; on the other hand,
consumerism refers to the tendency to buy more (excessive spending).
 Demand and purchase are considered positive. On the contrary,
consumerism is often considered a negative aspect.

Frequently Asked Questions

(FAQs)
How does income affect consumption?
Every individual spends according to their budget. The individual’s
income dictates their purchasing power. If the product is not
affordable, the consumer might let it go.
What is the consumption function?
If C denotes consumer spending, A denotes autonomous
consumption, M denotes marginal propensity to consume, and D
denotes real disposable income. The following equation depicts the
mathematical relationship between consumption and gross national
income:
C = A + MD

How does price impact consumption?

Several factors affect buying behavior and are directly or indirectly
linked to each. For example, the price of a product or service is a major
component of whether a consumer is willing to pay for it. In most
cases, price is also a driving point when comparing two similar
products.