Consumption

The term “Consumption” comes from the English language “Consumption ” and the Dutch language ” Consumptie ” means to enjoy or make use of both material and non material material to meet the needs and satisfaction directly.

In everyday terms the consumption can be interpreted as meeting the needs, both those that are food or non-food both now and in the future in order to improve their welfare.

Meanwhile, according to the big Indonesian dictionary, the meaning of the word “consumption” is the use of goods produced (clothing, food, etc.) directly to meet the needs of our lives.

Definition of consumption according to experts

According to Mankiw consumption is as a expenditure of goods and services by households. The term expenditure here includes household spending that is durable such as vehicles or household equipment and goods that are not durable like food & clothing. While the term service here includes things that do not have a concrete form, such as maintenance and haircuts. Education is also included in the consumption of services.

Samuelson and Nordhaus (2001), consumption is expenditure that is done to meet the purchase of goods and services to get satisfaction and to meet their needs. Consumption is classified into two, namely routine consumption and temporary consumption. Consumption that is routine has the meaning as expenditures made for the purchase of goods and services repeatedly over many years. While the meaning of consumption is temporary is any additions that are unexpected in routine consumption.

According to Muhamad Abdul Halim, household consumption expenses include expenditures by households to obtain goods and services as daily necessities in a certain period.

From a number of notions of consumption above, it can be concluded that “consumption” is the expenditure carried out by households or communities in obtaining goods or services in a certain period to meet the necessities of life.  

Consumption Theory

  1. John Maynard Keynes (1930)

According to theorist John Maynard Keynes gives an opinion on consumption theory. He said the current amount of consumption is directly related to income. The function or formulation of John Maynard Keynes’s theory to describe the level of consumption in various income.

C = a + bY

Ket

C = household consumption (aggregate)

a = autonomous consumption (amount of consumption when income is zero)

b = MPC

y = disposable income

From the function above Keynes makes an assumption regarding consumption theory, which is as follows:

    • The marginal propensity to consume is the amount consumed from the income received is between zero and one. From these assumptions, explained if when someone’s income increases, the higher the level of consumption & savings.
    • The ratio of consumption to income, or commonly referred to as the tendency to consume on average falls when income rises because a portion of the rest of his income is left to save. According to Keynes, the proportion of savings in the middle economic level would be different from the lower economy (poor people). Rich people usually save a large amount compared to poor people.
    • Income is an important determinant of consumption while the interest rate is not given much attention.

Based on the theory proposed by Keynes, it can be concluded that the level of consumption of a person is influenced by the level of income.

  1. Ernst Engel

Theory Ernst Engel said when the level of income increases, the proportion of income that will be spent on buying food will decrease or decrease. This is because in Engel’s law states that the level of welfare of a person can be said to increase if the comparison of expenditures used for food consumption tends to decrease when compared to expenses & vice versa consumption of expenditures for non-food will increase.

Several factors cause the shift in demand for the consumption level, including:

    • The level of income per capita society
    • The taste and taste of consumers on these goods
    • Prices of other goods, especially goods which are complementary and substitute
    • Consumer’s perception of the price of the item.

The grouping of consumer goods demand consists of Superior good (luxury goods), inferior good (goods of low quality), and normal good (normal goods). The definition of superior good is the change in the amount of goods demanded is greater than the amount of change in consumer income. While inferior good is an item that when consumers’ income increases, the amount of goods demanded will decrease. And normal good is goods that we often see every day in general, such as food, clothing and so forth.

There are four conclusions that Ernst Engel formulated in his research or commonly referred to as Engel’s law. Among the conclusions he formulated were:

  • When income increases, the percentage of expenditure for consumption tends to decrease (smaller).
  • When expenses in consumption of clothing tend to be fixed and do not depend on the level of income .
  • The percentage of consumption expenditure for expenditure is relatively fixed & does not depend on the level of income.
  • If income increases, the percentage of expenditure for education, welfare, recreation, luxury goods, and savings also increases.
  1. Ari Sudarman and Algifari (1996)

Theories put forward by Ari Sudarman and Algifari divide a person’s consumption patterns into 3 parts.

    • Someone who is aged from zero years to a certain age where the person has earned his own income, before that person can generate their own income then the person experiences dissaving, meaning he consumes but does not produce or have his own income.
    • Someone who is trying to work to earn his own income until the person is right at the age of age can not work anymore, such conditions are no longer able to earn their own income. In these circumstances, the person experiences dissaving
    • When someone is at an old age where that person is no longer able to generate income on their own. In conditions like this the person experiences dissaving. In fact people accumulate wealth in fact people accumulate wealth throughout their lives not only from retired people. If there is an increase in wealth, the level of consumption means that it will increase as well and will be able to be maintained for longer and in the end the life hypothesis will suppress the desire for consumption.
  1. James Dusenberry

James Dusenberry in his theory states that consumption expenditure in a society will be determined by the level of income it has ever achieved. If the income is reduced, consumers will not reduce spending much for consumption purposes. To maintain a high level of consumption, it is done by reducing savings

saving saving. If their income rises, their consumption level will also increase, although not too big. Meanwhile, if saving increases rapidly, this reality we encounter until the high level of income that we have achieved will return. After the peak of the previous income has passed, then the extra income will cause a lot of increased expenditure for consumption, while on the other hand the increase in saving is not so fast.

The theory put forward by James Dusenberry with his assumptions, as follows:

    • Household tastes to consumer goods are inter-dependent, meaning that expenditure for household consumption needs will be influenced by expenditures made in the surrounding environment.
    • Consumption expenditure is irreversible meaning the pattern of a person’s consumption expenditure when it rises is different from the pattern of expenditure when income decreases.
  1. M Friedman (1975)

In his theory, the community can be divided into two groups, namely people with permanent income and people who have temporary income.

Permanent income is income that a person expects to survive in the future. While temporary income is part of income that is not expected to continue to survive. If the income is sometimes positive and vice versa.

Consumption Purpose

 Usually someone who does consumption has a certain purpose, which is:

  • Gradually reduce the use value of an item or service

The part included in this part is the use of goods or services which are not used up in a single use or in a short time. For example cars, motorcycles, clothing, household furniture and so on. To reduce the value of these items takes time gradually

  • Spend or reduce the use value of an item at once

Included in this category are goods that are used in disposable items, or items that last a long time, for example food & drinks. Because if it is not spent all at once, then the material will be damaged, stale, expired, so it has no value or quality.

  • To satisfy both spiritual and spiritual needs

Things that are included in this consumption activity is like a pilgrimage or umrah for Muslims to Saudi Arabia. A trip like this will cause a certain sense of satisfaction.

Factors that influence people’s consumption patterns

According to Suparmoko, In addition to income factors, there are several factors that affect people’s consumption, including the following:

  1. Taste factor

Each individual has different tastes, although there are similarities such as income level and have the same age. This is due to differences in individual tastes

  1. Socio-economic factors

Includes, age, education, and family circumstances that have an influence on consumption expenditure. Baptism rates will be higher in the young age group and reach a peak in middle age and eventually fall in old age

  1. Wealth factor

A person’s wealth explicitly or implicitly is categorized as an aggregate function in determining consumption factors. For example the permanent income expressed in the theories of Friedman, Albert Ando and Franco Modiligliani, states that the net return from wealth is the most important factor in determining consumption.

  1. Capital gains and losses

Capital gains by increasing net returns from capital will encourage increased levels of consumption, in contrast to the occurrence of capital losses will reduce the level of public consumption.

  1. Interest rate

Classical economists argue that consumption is a function of the interest rate. They believe that the interest rate encourages savings and reduces consumption.

  1. Price level

Until now, real consumption is still considered a function of real income. Therefore, an increase in nominal income accompanied by an increase in the price level with the same proportion will not change in real consumption.

 

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