In
economics,
consumption is the primary motivating force in the
wealth or
utility maximizing paradigm. Consumers choose the group of
goods and
services that make them happiest. All activities are directed towards consumption, either of traditional goods and services, or of personal and perhaps unique activities. (See
Irving Fisher's Rate of Interest)
In a one-person world, production is directed towards those goods and services that the individual prefers. With the advent of exchange, consumption is altered by the ability of individuals to take advantage of the gains from trade to adjust their consumption activities with others in the economy.
In Keynesian economics, consumption is the total personal consumption expenditure, or the purchase of currently produced goods and services out of income, out of savings (net worth), or from borrowed funds. It refers to that part of disposable income (income after taxes paid and payments received) that does not go to saving. Analyzing human consumption of available resources play an important role in economics, environmentalism, and geographical analysis. Consumption is generally measured by household consumption expenditures (known as personal consumption expenditures in the United States) and is determined by the consumption function, especially by the marginal propensity to consume. It is part of aggregate demand or effective demand. It can also be defined as "the selection, adoption, use, disposal and recycling of goods and services", as opposed to their design, production and marketing.
Often, as in the permanent income hypothesis, the word "consumption" refers instead to the benefit received from consumer goods and services (as opposed to the amount spent on such products).
