Theory of Consumption

Macro Economics Principle

 

Arranged By :

Resha Ariella

1610631030230

Accounting 1-AK-8

Faculty of Economy and Bussiness

University of Singaperbangsa Karawang

FOREWORD

First, Praise God Almighty for all the blessings so that this task can be completed. Don't forget i would like to thank Mr. Irvan Yoga Pardistya, SE., MM., Ak.

Hopefully this task can increase knowledge and provide benefits to the readers. Due to lack of knowledge and I am still in the learning process, I believe this task is flawed, therefore I hope any recommendation or criticisms from the readers to make this task better.

Karawang , 19th September 2016

Resha Ariella

List of Contents

Cover...............................................................................................................

Foreword........................................................................................................

Chapter 1 :

Preface............................................................................................................

Chapter 2 :

Explanation....................................................................................................

Reference........................................................................................................

 

Chapter 1

A. Background

The concept of consumption, the expenditures made by households on goods and services with the aim to meet the needs of those who commit the expenditure or revenue spent well. Part of the unspent revenue-called savings, denoted by the letter "S" the initials of the word saving. If consumption expenditures everyone within a country are summed, the result is the private consumption of the country concerned. Economic growth is currently driven by consumption because of the role of investment and export drive economic growth.

B. Problem Formulation1. What is Consumption Theory?2. Who are the actors?3. Why is consumptions realted with income?4. How can Income is the major factors for consumptions?

C. The Goals of this task is to:1. Knowing what is Consumption Theory.2. Knowing who is included in the Actors of Economics.3. Knowing the Relation between Consumption and Income.4. Knowing the Consumption Factors.

Chapter 2

Explanation

Theory of consumption

Consumption expenditure consists of government consumption (government consumption) and household consumption (household consumption / private consumption). 

Factors that influence the level of household consumption expenditure, among others:

1. Economic FactorsFour factors that determine the level of consumption, i.e:

• Household Income

Household income is very large impact on the level of consumption. Usually the better the income, the higher the level of consumption. Because when income levels rise, households' ability to buy various consumer needs become greater or may also become increasingly consumptive lifestyles, at least increasingly demanding good quality.

• Household Wealth

Household wealth is the real wealth (houses, land, and cars) and financial (term deposits, shares and securities). Such property can increase consumption, because it increases disposable income.

• Interest Rate

The high interest rates could reduce consumption. With high interest rates, the economic costs (opportunity cost) of consumption activities will be more expensive. For those who want to consume by borrowing, for example by borrowing from a bank or a credit card, interest costs more expensive, so it is better delay / Decrease the consumption.

• Household Expectation About The Future

The internal factors are used to estimate the future prospects of the household such as: employment, careers and salaries, many family members who have been working.While external factors affecting among other things: domestic and international economic conditions, the types and direction of economic policy conducted by the government.

2. Demographic Factors

• Total population

The population that many will increase consumption spending, although the average spending per person or per family is relatively low. Consumption expenditure of a country will be very large, when the number of the inhabitants and a per capita income higher.

• Proportions Citizen

Proportions Citizen influence on the level of consumption, among others: 

- The greater the level of consumption. Because more and more people
working, the income will be higher.
- The higher the level of public education, consumption levels are also higher, because when a person or family more highly educated then their needs more. 

- More people living in urban areas (urban), consumption is also higher. The common cause of urban life styles and more consumptive than rural peoples.

3. Non-Economic Factors

Non-economic factors affect the amount of consumption that is a factor of social culture. habits, eating habits, changes in ethics and values as want to emulate other communities that are considered more severe or ideal.

• Keynesian theory (Keynesian Consumption Model)

a. Relations Diposable Income and ConsumptionKeynes explained that the current consumption is strongly influenced by the current diposable income. If the disposable income increases, the consumption will also increase. But consumption is not as big an increase in Disposabel Income.
 C = Co + BYD Note: C   = consumption
                                   Co = autonomous consumption
                                   b    = marginal propensity to consume (MPC)
                                   Yd = Disposable Income
                                   0 <b <1b. Marginal propensity ConsumeMarginal propensity to Consume is a concept which gives an overview of some consumption increases when disposable income increased by one unit.
 MPC = C
              Yd0 <MPC <1
 c. Tendensy of Averages ConsumeAverage propensity to Consume is the ratio of total consumption to disposable income total.
 APC = C
                    YdBecause of the magnitude of MPC <1, then the APC <1
  d. Relations between Consumption and SavingsDisposable income received by households are mostly used for consumption, the remaining savings. each additional disposable income will be allocated to increase the consumption and savings. The amount of additional disposable income that becomes additional savings is called the marginal propensity to save. While the ratio of savings to disposable income levels called avarage propensity to save.Formula :Yd = C + S (saving)MPS = 1 â € "MPCAPS = 1 â € "APC

 Actors of Economic

a. HouseholdPerpetrators of domestic household consumption meant is that both individuals and groups that aim to wear or use goods or services. In family households own the factors of production such as labor and capital. Production factors by family households sold to domestic company by obtaining compensation or reward in the form of wages and salaries as well as interest and rent.

b. Firms or Company

The company is a business form, operate any kind of business that is permanent, continuous and established, work, and domiciled in the territory of Indonesia for the purpose of gain and profit.

c. Government

Government is the institution of governance whose job to pay attention to the economic activity is still running. The role of government in economic activities are as manufacturers, distributors, and consumers.

d. Foreign Sector

Economy is said to be closed if it doesn't interact with the foreign sector. interaction with the foreign sector in an open economy with a simplified mechanism of export and import.
Export is the flow of revenue from abroad to the domestic economy, while Imports are expenses of the domestic economy to the foreign sector.

Relation between Income and Consumption 

An economics expert JM. Keynes, said that a person spending for consumption and savings are influenced by income.
The greater a person's income, the more the level of consumption as well, and the savings rate will increase. and instead if the level of one's income is getting smaller, then all income is spent on consumption so that the savings rate of zero. 

Income is Major Factor of Consumption

Consumption level person with another person is different, because it is influenced by several factors. The main factor is the level of income. Many people who say that if the level of income increases, people tend to be consumptive, or the level of consumption rises.
When the height of the low power consumption of a person associated with the high and low levels of income, consumption behavior psychologically because they are related to income level.
If the high consumer incomes, the consumption is also high because it is related to the fulfillment of the infinite. instead, if a person's income is low, consumption is relatively low because it deals with the desire to survive.
In addition to revenue, the rate also affects a person's wealth. This wealth can be obtained from the magnitude of past savings, inheritance. With a certain level of wealth then even though actual revenues decreased from the previous period could be equal to the consumption level konsumsonya before, or maybe even the level of consumption is greater than ever. 

Reference

1. Raharja dan Mandala Manurung.  Pengantar Ilmu Ekonomi. Lembaga Penerbit Fakultas Ekonomi Universitas Indonesia . Jakarta 2008 
2. Sadono Sukirno. Makroekonomi, Teori Pengantar. Raja Grafindo Persada. Jakarta 2013 
3. http://www.econ.yale.edu/smith/econ510a/notes99.pdf
4. http://www.ekonomi-holic.com/2011/10/materi-pendapatan-konsumsi-tabungan-dan.html
5. http://www.pendidikanekonomi.com/2015/01/5-faktor-yang-mempengaruhi-tingkat.html