CONSUMPTION

in economics, the final using up of goods and services, i.e., excluding the use of intermediate products in the production of other goods. Purchases of plant and machinery by business organizations are regarded as investment and are not counted as consumption, while purchases of durable goods by private individuals are counted as consumption by economic statisticians. In developed countries consumption as defined above accounts for about three quarters of the gross national products. Public authorities account for 1520 percent of consumption, representing defense spending, social payments, salaries of civil servants, and current expenditures of state enterprises. The distribution of private expenditure among food, durable goods, and nondurable goods shows a remarkable similarity among developed countries with similar economic standards. A trend common to all countries is that as the standard of living goes up the proportion of expenditure on food declines and that on durable or luxury goods goes up. This is because food consumption is relatively inelastic; that is, once a level of sufficiency is attained, expenditures on food tend to increase more slowly than increases in income. Another contributing factor in industrializing nations is the lower prices for durable goods resulting from mass production and technical progress, enabling a larger proportion of consumers to afford them. Although completely reliable data for the less developed countries is not available, incomplete statistics suggest that food expenditure accounts for nearly twice the proportion seen in developed countries and absorbs up to 75 percent of household budgets, leaving little excess for purchases of consumer durables. In some rural areas, food expenditure accounts for a very small proportion, reflecting the subsistence nature of the local economy. The classical economic theory explaining consumer behaviour is built on the notion of marginal utility. According to this notion, a consumer obtains a given amount of satisfaction (utility) from the purchase of a product, but the incremental satisfaction gained from additional purchases of the same product decreases as his supply increases. Consumers are assumed to be rational and therefore to allocate their expenditures in such a way as to maximize the total satisfaction obtained from all purchases. According to this simple economic model, incomes and prices are the two major determinants of consumption. Although in a complex modern society other factors such as social pressures, fashion trends, habit, etc., play a role, it is still true that price and income are the chief considerations. Methods of calculating income and price elasticity of products have been developed by economists to explain variations in consumer demand for goods and services. Products for which demand increases more than proportionately for a given increase in income (luxury items, for example) are defined as being income-elastic, and those for which demand increases less than proportionately (food, as previously noted) as income-inelastic. Similarly, price elasticity measures the responsiveness of demand to price changes; if the change in demand is less than proportional to the change in price, demand for the product is regarded as inelastic, and if it is more than proportional, elastic. Income elasticity quantifies the observation that expenditure on food declines as a proportion of income as income rises; in developed countries the income elasticity of common food items is around 0.3. Consumer durables and luxuries have income elasticities of greater than 1.0. Basic products with easily available substitutes are usually price elastic, and a given rise in price triggers a more than proportional decline in demand. Scarce products or those with few substitutes (e.g., gasoline for cars) are price inelastic, and demand falls less than proportionally for a given increase in price. Such rational behaviour obviously functions best in an environment where there is sufficient information on the price and performance of goods. Most consumer goods are too complex for direct comparisons to be made by consumers. Such difficulties have given rise to consumers' organizations in many developed countries that compare prices and quality of many consumer products for the benefit of their subscribers (see consumerism). Exceptions to rational consumer behaviour abound. A common one is the phenomenon of conspicuous consumption, noted when the extremely high price of a product creates a prestige value leading to a much higher demand than the simple pricedemand relation would predict. in economics, the using up of goods and services. In modern economic theory the term means, specifically, final consumption, as distinguished from the using up of goods to produce other goods in a manufacturing industry. Final consumption must also be distinguished from the purchase by industry of fixed assets such as buildings and machinery, which is known as capital formation or investment. On the other hand, consumption expenditure by private persons is understood to include the purchase of durable goods, such as furniture or vehicles, as well as works of art that may increase in value over a period of time. The acquisition of such goods should actually be considered asset formation rather than consumption and should be classified with the acquisition of other assets such as houses, schools, roads, and hospitals. In modern industrial economies, consumption as previously defined accounts for 70 or 80 percent of total national expenditure. Even in the Western capitalist countries a significant part of total consumption is determined directly by the expenditure of public authorities. Some of the benefits of this part of consumption, such as expenditure on defense or on public health, are widely diffused; others are directed by common consent to the benefit of particular sections of the community. These consist in part of specialized services such as education or medical care; but other servicessuch as unemployment compensation, state pensions for the elderly, and assistance to families deprived of the support of a wage earnerare designed to create greater equality in levels of consumption than would otherwise be obtained. Additional reading The two classic references for understanding the modern theory of consumption are Franco Modigliani and Richard Brumberg, Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data, in Kenneth K. Kurihara (ed.), Post-Keynesian Economics (1954, reissued 1993), pp. 388436; and Milton Friedman, A Theory of the Consumption Function (1957). John Burnett, Plenty and Want, 3rd ed. (1988), describes the food habits and dietary standards of the British in the 19th century. Carlo M. Cipolla, European Culture and Overseas Expansion (1970), contains an account of the cultural and commercial contacts between Europeans, Africans, and Asians during the Renaissance. John Kenneth Galbraith, The Affluent Society, 4th ed. (1984), studies the social and economic consequences of advanced industrialism in which basic human needs can be easily satisfied but in which the economy is geared to the pursuit of luxury consumption by the middle and higher income groups. Thorstein Veblen, The Theory of the Leisure Class (1899, reissued 1994), argues that the consumption of the wealthy classes is aimed mainly at demonstrating status rather than satisfying basic needs. Simon Kuznets, Modern Economic Growth (1966) based on exhaustive statistical studies, compares the historical development of modern economies. E.J. Mishan, The Costs of Economic Growth, rev. ed. (1993), critiques the goal of economic growth as a major aim of policy. Vance Packard, The Hidden Persuaders, rev. ed. (1980), provides a somewhat partisan attempt to show that advertising techniques create artificial wants through psychological manipulation. A textbook covering modern consumption theory at an advanced level is Angus Deaton and John Muellbauer, Economics and Consumer Behavior (1980); and an excellent survey on recent contributions to this area is Angus Deaton, Understanding Consumption (1992). J.A.C. Brown The Editors of the Encyclopdia Britannica