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Consumption expenditure refers to the money individuals spend on goods and services. In economics, we can also say it is the residual disposable income after saving. Economists assume individuals allocate their income for two purposes: consumption and saving. So, we can say consumption is the income that remains after we allocate it as savings.
Consumption expenditure includes money spent on three categories: durable goods, non-durable goods, and services. The first two represent tangible products, while the latter are intangible.
In macroeconomics, consumption spending forms aggregate demand, in addition to business investment, government spending, and net exports. So, when it increases, we expect the economy to grow as businesses increase their production to meet higher demand.
We’ll explore the three main categories of consumption expenditures and how they impact our choices and the economy as a whole.
Three categories of consumption expenditure
Consumption expenditure – the money you spend on various goods and services – can be categorized into three distinct groups, each with its own characteristics and economic implications. Let’s explore these categories in detail:
Durable goods (long lifespan – 3+ years)
Durable goods form the backbone of long-term household assets, designed to provide utility and function over extended periods. Encompassing everything from automobiles and refrigerators to furniture and electronics, these tangible items are expected to last for a minimum of three years, and often considerably longer.
The high cost and extended lifespan inherent to durable goods necessitate a more strategic approach to their acquisition. Consumers typically engage in a meticulous evaluation process, including thorough research, product comparisons, and potentially securing financing options before finalizing a purchase. Loans or credit instruments may be utilized to spread the financial burden over a longer timeframe.
Economic sensitivity: This emphasis on long-term investment renders durable goods particularly susceptible to fluctuations in economic conditions. Two key factors contribute to this sensitivity:
- Interest rate fluctuations: Rising interest rates directly translate to increased borrowing costs. This can act as a significant deterrent for consumers contemplating loans to finance large purchases like cars or appliances.
- Consumer confidence: Periods of economic downturn or recession often witness a decline in consumer confidence. During such times, individuals may prioritize saving or allocate their budget towards essential goods, leading to a reduction in discretionary spending on non-essential durable goods.
In essence, durable goods represent a substantial investment for consumers. Consequently, economic factors that elevate borrowing costs or heighten economic uncertainty can trigger a noticeable decrease in spending on these long-lasting purchases. This shift in consumer behavior can have a cascading effect, impacting industries heavily reliant on durable goods sales.
Non-durable goods (short lifespan – immediate consumption)
Non-durable goods are the workhorses of our daily lives. Unlike their long-lasting counterparts, these tangible items boast a relatively short lifespan, often meant for immediate consumption or use within a short period. Imagine that delicious meal you just prepared – the groceries used to create it are classic examples of non-durable goods.
Replenishment essentials: A defining feature of non-durable goods is the need for frequent restocking. Food, beverages, and household supplies like detergent or soap are constantly used up and require regular replacement to maintain our daily routines. Similarly, clothing and shoes, while lasting somewhat longer, eventually wear out or go out of style, necessitating new purchases.
Spontaneous decisions: The short lifespan and frequent repurchase nature of non-durable goods often translate to less planning before buying compared to durable goods. A quick trip to the grocery store or a clothing sale might lead to an unplanned purchase, unlike the careful consideration that goes into buying a new refrigerator. This characteristic makes non-durable goods more susceptible to impulse purchases and marketing strategies.
Economic indicators: Consumption patterns of non-durable goods can also serve as economic indicators. Fluctuations in spending on groceries or clothing can reflect consumer confidence and overall economic activity. During economic downturns, consumers might prioritize essential non-durables like food and cut back on discretionary purchases like new clothes.
In essence, non-durable goods are the essential items that keep our lives running smoothly. Their short lifespan and frequent need for repurchase make them a vital category within consumption expenditure, and their spending patterns can offer valuable insights into the health of the economy.
Services (intangible benefits)
Have you ever called a plumber to fix a leaky faucet, or enjoyed a relaxing haircut? These are experiences – a defining characteristic of services. Unlike goods, services are intangible experiences that provide benefits to consumers. You can’t physically touch a haircut or the expertise of a financial planner, but you experience their value.
Services are delivered by people or systems and provide consumers with a sense of well-being, convenience, or problem-solving. Haircuts, plumbing repairs, healthcare, financial planning, banking services, and insurance are just a few examples of the vast array of services that contribute to our overall well-being.
Marketing services require a different approach compared to tangible goods. Since services are intangible, traditional marketing strategies need to be supplemented with additional elements. These elements form the extended marketing mix:
- People: The quality of service delivery heavily depends on the skills and expertise of the people involved. Training and customer service become paramount in creating a positive service experience.
- Processes: Efficient and reliable service delivery processes ensure a smooth customer experience. Imagine waiting for hours at a doctor’s appointment—inefficient processes can quickly turn a positive service into a negative one.
- Physical evidence: While the service itself is intangible, aspects like a clean salon environment, a professional website, or a welcoming office can create a positive perception in the customer’s mind.
Consumption expenditure and the economy
Consumption expenditure isn’t just about individual purchases – it’s a critical driver of the overall economy. Let’s assume all the spending by individuals on goods and services in an economy. This collective spending is called aggregate demand. It’s a key component alongside business investment, government spending, and net exports. When consumption expenditure increases, it translates to a rise in aggregate demand.
As aggregate demand strengthens due to higher consumer spending, businesses take notice. They see an opportunity to sell more and potentially increase profits. To meet this rising demand, businesses are incentivized to ramp up production. This might involve hiring more workers, extending operating hours, or even investing in expanding their production facilities.
Increased production activity across various businesses has a ripple effect throughout the economy. It leads to:
- Job creation: As businesses hire more workers to meet demand, the unemployment rate falls. This creates a positive cycle as newly employed individuals have more income to spend, further boosting consumption expenditure.
- Economic growth: As businesses produce more and people spend more, the overall economy experiences growth. This is reflected in factors like rising Gross Domestic Product (GDP), which indicates a healthy and expanding economy.
In conclusion, consumption expenditure acts as the engine that propels economic growth. When consumers spend more, businesses respond by producing more, creating a positive ripple effect that benefits the entire economy.
