Consumption, the function of consumption is 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 inner essence.
The concept of consumption and savings
The functions of savings and consumption are extremely important for understanding the essence of the market economy in its various interpretations. In its most general form, consumption is considered as the amount of money spent in a given state, the main purpose of which is the purchase of material items and the consumption of any services. It is also extremely important that these goods and services are used solely to meet individual and collective material and spiritual needs.
Consumption, the consumption function is in the closest relationship with the savings function. She, 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 pillow.security 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 saving that is one of the main problems that have occupied economists of the 20th and 21st centuries. The works of D. Keynes played a special role here.
The main provisions of the theory of D. M. Keynes
D. Keynes is rightfully considered one of the most important figures in the economics of the twentieth century. His contribution to the theoretical substantiation of a wide variety of macroeconomic problems has been marked 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 interfere in this system. By stimulating demand, the scientist pointed out in his works, the government has the opportunity to overcome the crisis in the shortest possible time. Consumption, saving and investment play an extremely important role in this case.
Functions of savings 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 to create a balance between supply and demand, and the first should be somewhat ahead of the second. 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 plays 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 state influence 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 on a countrywide scale, several main groups of goods and services are usually distinguished, according to the level of purchase of which the population is divided into several groups. At the same time, it is assumed that the totality of goods and services purchased by each particular family is unique, therefore, in the general analysis, the so-calledconsumption function model.
Engel models: essence and consequences
Models that describe consumption functions in economics 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 arranged in the following sequence: food, clothing, apartment (house), transport, he alth 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 certain period of time, then food costs will also increase, reducing their share in the overall structure of consumption. Savings should grow at the fastest rate with an increase in income, since, according to Engel, they belong to the group of luxury goods.
Keynesian consumption function: the main factors influencing the priority of citizens' choice
D. Keynes was in many respects in agreement with Engel's concept, but gave it a more complete and mathematically verified form. According to his teachings, consumption is determined by the following main factors.
Firstly, these are the incomes that remain with citizens after the payment of all mandatory taxes and fees in favor of the state. This disposable income is the foundation of citizens' future spending.
Secondly, Keynes' consumption function included such an importantindicator as the ratio of the level of costs (that is, consumption) to total income. This factor was called the average propensity to consume, and, according to the scientist, this coefficient should have gradually decreased with the growth of citizens' incomes.
Finally, thirdly, Keynes specifically introduced such a concept as the marginal level of propensity to consume. This coefficient showed what proportion of consumption was in the money that a citizen received in excess of his previous income.
Basic postulates of Keynes's theory
Consumption, a consumption function 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, and this is the key idea of Keynes, far from all the additional income will go to consumption, part of it may turn out to be both in savings and in investments. The main factors influencing this distribution, the scientist attributed the following:
- Consumption is a factor that determines the way of life of predominantly poor and middle strata of society. If we are talking about the elite, then almost all additional income is converted into savings or investments.
- Consumption is determined not only by the representation of a particular person and family, but also by the social environment. It has been proven that even people with a not very high income tend (at least partially) to buy those things that are acquired by the middle and upper strata of society, acting as a kind ofpublic standard. That is why, quite often, the level of savings among the lower strata is much lower than even what they could have been.
- In the event of a fall in income, consumption will increase at a much faster rate than it fell in the reverse process.
The main conclusion from these postulates of Keynes is the absence of a direct upward (or downward) relationship between the increase in family income and the increase in consumption.
Graphic representation of the function
All key assumptions and hypotheses of Keynes are in good agreement with the resulting consumption schedule. The graph of the consumption function is a straight line at an angle to the x-axis, the value of which is less than 45°, the more developed the society is in terms of the market.
The virtual point that intersects the proposed schedule, at which all income would go to consumption, is called the point at which there are no savings, but the family does not make loans either. To the right of this function is a zone of positive savings, and to the left - a negative one, that is, one when a person is forced to take loans in order to provide himself with at least elementary benefits.
The consumption function looks like a line extended to the right. In order to find out the level of consumption, it is necessary to calculate the distance from the y-axis to the point in question. At the same time, the quantitative expression of savings can be calculated by drawing a segment from the function under study to the bisector.
Psychological lawKeynes
As mentioned above, among other things, an American scientist introduced into scientific circulation the concept of "marginal propensity to consume", which is a quotient of the increase in consumption to a similar indicator of income. It was from this attitude that the famous "psychological law of Keynes" flowed.
The essence of this law confirms the consumption schedule - the higher the income level of a particular person or any particular family, the greater part of these additional funds goes to savings. According to the structure of spending, one can judge both the level of well-being of the family and the level of economic development of the whole society.
This law also confirms the principle of utility formulated back in the 19th century. The utility function of consumption has the form of the ratio of satisfaction with all goods and the total amount of purchased material goods and services. The higher the level of income, the higher the degree of usefulness of the purchased items.
