July 14, 2024 

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AMERICAN ECONOMIC ASSOCIATION: An organization of over 25,000 professional economists. Founded in 1885, this premier top-of-the-economic-association-list publishes the prestigious American Economic Review, arguably THE number one scholarly U.S. economic journal and the Journal of Economic Literature, arguably THE number one index of economic journal publications. The AEA, as acronymically inclined economists call it, also sponsors an annual conference where professional economists present scholarly papers on their latest scholarly research.

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The use of resources, goods, or services to satisfy wants and needs. At the macroeconomic level, consumption is reflected as expenditures by the household sector on gross domestic product. At the microeconomic level, consumption is important to utility, demand, and market exchanges. Consumption is the ultimate goal of economic activity.
Consumption is the process in which people use goods or services to satisfy their wants and needs. It is motivated by the unlimited wants and needs aspect of scarcity. A hungry person eats a club sandwich for lunch. A cold person turns up the thermostat on the furnace. A bored person watches television. A tired person spends the night at a motel. Each is an act of consumption. Each act of consumption satisfies wants or needs.

Such consumption acts are important to microeconomics and especially market demand. The consumption of a club sandwich is likely to first involve the purchase of a club sandwich, or at least the meat, bread, cheese, and other ingredients needed for preparation. How much club sandwich consumption occurs depends on the satisfaction obtained and the price paid.

Such acts are also important to macroeconomics. How much income the household sector devotes, in total, to the purchase of goods, such as club sandwiches, used for consumption affects short-run business-cycle instability and long-run economic growth.

Starting with Scarcity

Consumption is motivated to address the scarcity problem. In particular, people consume goods and services to satisfy their unlimited wants and needs. Should wants and needs ever achieve total fulfillment, then consumption would cease.

The importance of scarcity to human existence, places consumption at the center of economic activity. Consumption is the ultimate goal, the end objective of production, investment, exchange, and everything else that transpires in the economy.

Satisfaction, Not Destruction

In everyday use, the term consumption commonly refers to "using up, destroying, or doing away with completely." The logic that gives rise to this notion is clear for many acts of consumption. For example, eating causes a club sandwich to "disappear," it is "destroyed" in the process. The club sandwich no longer exists as a club sandwich.

However, the economic notion of consumption merely means using a good to satisfy wants and needs. The good need not disappear nor be destroyed. Watching an aesthetically-pleasing sunset is an act of consumption. Reading a spine-tingling mystery novel is an act of consumption. Enjoying a scintillating discussion about monetary policy with the Chairman of the Federal Reserve System is another act of consumption (for those who "enjoy" that sort of thing).

But in none of these examples is the good "used up or destroyed" like what results from eating a club sandwich. The sun, sky, and horizon remain intact, ready to provide other aesthetically-pleasing sunsets in the future. The mystery novel awaits other readers. The Chairman of the Federal Reserve System is able to discuss monetary policy with others.

In fact, this common perception of consumption as "using up" often contributes to pollution problems. Thinking that consumption "uses up or destroys" goods suggests that they simply vanish after satisfying wants and needs. However, according to some extremely important laws of physics, the goods do not disappear, they merely change form. More often than not, this new form is a waste product which causes environmental pollution.

Microeconomic Utility

The demand side of market exchanges relies on the act of consumption. People are willing and able to buy and consume the goods that satisfy wants and needs. Buyers are willing to pay higher prices for those goods that provide greater satisfaction, that is, utility. For this reason, consumption plays a key role in the theoretical analysis of market demand through consumer demand theory, utility analysis, and indifference curve analysis. People buy to consume.

For example, suppose that Duncan Thurly is willing to pay $3 for a hot fudge sundae. His demand for this product results because he wants (and perhaps needs) to consume a hot fudge sundae. Such consumption is expected to satisfy his physical need for food (and perhaps a few psychological needs, as well). Duncan is unlikely to demand hot fudge sundaes if he has no intention of consuming this good. He buys to consume.

Macroeconomic Expenditures

Consumption also takes center stage in macroeconomic analysis. The total expenditures made by people like Duncan Thurly and other members of the household sector affect business cycles and economic growth. Should the household sector, in total, decide to spend more or less on goods used for consumption, then the macroeconomy can experience business-cycle expansions and contractions. Should the household sector decide to devote a larger or smaller share of income to consumption, which determines the amount of saving that can be used to finance investment expenditures for capital goods, then economic growth is affected.

Suppose, for example, that the entire population of the country--the household sector--becomes increasingly optimistic about the state of the economy. They expect the economic future to be bright, rosy, and prosperous. As such, they increase consumption spending on new cars, new houses, and vacations.

This boost in consumption expenditures is likely to stimulate the economy, actually creating the expected prosperity--what is termed a business-cycle expansion--at least in the short run. In the long run, devoting more income to consumption and less to saving reduces the amount available for investment expenditures on capital goods. As such, the productive capacity of the economy might not increase, or it might even decrease, generating less economic growth or even negative growth.

Consumption Times Three

At the macroeconomic level, the term consumption arises in three related concepts.
  • Consumption: This is the generic term for the use of goods and services to satisfy wants and needs. This activity may or may not involve actual purchases or expenditures.

  • Consumption Expenditures: This is the more specific term referring to actual expenditures by the household sector on final goods and services, or gross domestic product. While the motivation behind consumption expenditures is generic consumption and the satisfaction of wants and needs, such is not guaranteed. That is, some consumption expenditures are for goods and services that do not provide satisfaction.

  • Personal Consumption Expenditures: This is the official measure of the consumption expenditures component of aggregate expenditures used in the calculation of gross domestic product. While the official number-crunchers try to measure ALL consumption expenditures, some are missed by the official calculation.


Recommended Citation:

CONSUMPTION, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: July 14, 2024].

Check Out These Related Terms...

     | consumption expenditures | investment | investment expenditures | saving | government purchases | government expenditures | net exports |

Or For A Little Background...

     | household sector | satisfaction | scarcity | unlimited wants and needs | market demand | microeconomics | demand price | macroeconomics | economics | consumer demand theory | utility analysis |

And For Further Study...

     | circular flow | business cycles | economic growth | economic goals | macroeconomic sectors | macroeconomic markets | macroeconomic problems | macroeconomic theories |

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