Consumption, the function of consumption - one of the most important concepts of modern economic theory. Different approaches to the justification of this term lead to very significant differences in the understanding of its internal essence.
The concept of consumption and savings
The functions of saving and consumption are extremely important for understanding the essence of a market economy in its various interpretations. In its most general form, consumption is considered as the sum of money spent in a given state, the main purpose of which is the purchase of tangible items and the consumption of any services. It is also extremely important that these goods and services are used exclusively to satisfy individual and collective material and spiritual needs.
Consumption, consumption function is in the closest relationship with the savings function. It, in turn, is nothing more than a part of the income received as a result of a certain activity, which at this particular moment remains unused and is the so-called airbag for a rainy day. At the same time, part of the savings can be invested by citizens in certain projects, turning into investments. It is the influence and interaction of such elements of the economy as consumption, investment and savings that is one of the main problems that occupied the economists of the XX and XXI centuries. A special role was played here by the works of D. Keynes.
The main provisions of the theory of D. M. Keynes
D. Keynes is rightfully considered one of the most important figures in the economic science of the twentieth century. His contribution to the theoretical justification of a wide variety of macroeconomic problems was noted by a number of state and international awards, as well as the emergence of a special term - Keynesianism, used to denote a special direction in neoclassical theory.
Keynes's consumption function is just one of the provisions of his neoclassical concept. Its essence boiled down, on the one hand, to the fact that any market system is a priori unstable, and on the other hand, that an active state policy is needed to regulate and intervene in this system. Stimulating demand, the scientist pointed out in his works, the government has the opportunity to overcome crisis phenomena in the shortest possible time. Consumption, saving and investing play extremely important roles in this case.
Functions of saving and consumption as components of the formation of effective demand
In his theoretical calculations, D. Keynes proceeded from the fact that the main problem of almost any economic theory is the creation of a balance between supply and demand, and the former should be somewhat ahead of the latter. In turn, effective demand is the most important step towards a constant increase in the level of national income, which is the most important task of any state in a market economy.
Thus, the Keynesian function of consumption is the basis for the successful development of society as a whole. A huge role in its correct interpretation and implementation lies on the shoulders of the state.
Consumption and its structure
Compared to savings and investment, consumption, the consumption function play a much more prominent role in the gross national product of any state. According to the latest data, in our country it is just over 50%, while in the United States it is almost 70%. Thus, consumption is the most important indicator of the development of market relations and the degree of influence of the state on economic processes in the country.
The structure of consumption usually includes all the costs of a particular family. However, in order to make it easier to analyze the internal structure of consumption throughout the country, usually there are several main groups of goods and services, according to the level of acquisition of which the population is divided into several groups. At the same time, it is assumed that the totality of the goods and services purchased by each particular family is unique, therefore, in the general analysis, the so-called consumption function model is used.
Engel's models: essence and consequences
The models that describe the consumption functions in economic science are called Engel models, in honor of the famous German statistician of the second half of the 19th century, E. Engel.
The German scientist, formulating his laws, proceeded from the fact that the groups of expenses according to their priority are located in the following sequence: food, clothing, apartment (house), transport, health care and education services, accumulated savings.
However, Engel not only singled out these groups, but also proved a certain pattern: if family incomes increase over a period of time, then food costs will also increase, reducing their share in the overall structure of consumption. Savings should grow at the fastest pace with increasing incomes, since, according to Engel, they belong to the group of luxury goods.
Keynesian consumption function: the main factors affecting the priority of citizens' choice
D. Keynes was largely in agreement with Engel's concept, but gave it a more complete and mathematically verified form. According to his teaching, consumption is determined by the following main factors.
Firstly, these are the incomes that remain with citizens after payment of all mandatory taxes and fees to the state. This disposable income is the foundation of future spending by citizens.
Secondly, Keynes's consumption function included such an important indicator as the ratio of the level of costs (i.e. consumption) to total income. This factor was called the average propensity to consume, and, according to the scientist, this coefficient should gradually decrease with the growth of citizens' incomes.
Finally, thirdly, Keynes specifically introduced the concept of the marginal level of propensity to consume. This coefficient showed what share was consumed in the money that a citizen received in excess of his previous income.
Keynes Keynes Postulates
Consumption, the consumption function, which was developed and mathematically proved by a well-known economist, will allow us to conclude that with the growth of family income, its spending on consumption also increases. However, this is Keynes' key idea, not all of the additional income will be spent on consumption, part of it may turn out to be both in savings and in investments. The main factors affecting this distribution, the scientist attributed the following:
- Consumption is a factor determining the lifestyle of the predominantly poor and middle sections of society. If we are talking about the elite, then almost all of the additional income turns into savings or investments.
- Consumption is determined not only by the representation of a specific person and family, but also by the social environment. It is proved that even people with a not very high income level tend (at least partially) to buy those things that are acquired by the middle and upper layers of society, acting as a kind of social standard. That is why quite often the level of savings in the lower strata is much lower even than what they might have.
- In the case of falling incomes, consumption will increase at a much faster rate than it would fall in the opposite process.
The main conclusion from these Keynes postulates is the absence of a direct upward (or downward) relationship between an increase in family income and an increase in consumption.
Function Graphic
All of Keynes's main assumptions and hypotheses are in good agreement with the resulting consumption schedule. The graph of the consumption function is a straight line that is at an angle to the abscissa axis, the magnitude of which is the less 45 °, the more developed this market is in society.
The virtual point crossing the proposed schedule, in which all income would go to consumption, is called the point at which there are no savings, but the family does not make loans. To the right of this function is a zone of positive savings, and to the left - a negative one, that is, when a person is forced to take loans in order to secure at least basic benefits.
The consumption function has the form of a line extended to the right. In order to find out the level of consumption, it is necessary to calculate the distance from the ordinate axis to the point in question. At the same time, the quantitative expression of savings can be calculated by drawing a segment from the studied function to the bisector.
