Consumer Soverignty

• Consumer Sovereignty


  The theory that suggests consumers determine what and how much is produced, therefore determining the allocation of resources in the economy
• Technical Efficiency


  Producing goods at least cost
• Allocative Efficiency


  Allocates resources to satisfy consumer preferences
• Dynamic Efficiency


  Responds to changes in consumer preferences and technological improvements
• Average Propensity to Consume


  The proportion of income spent on consumption
• Average Propensity to Save

  The proportion of income spent on saving
• Autonomous Consumption


  Unrelated to changes in income
• Induced Consumption


  Directly related to changes in income
• Patterns of Consumer Spending & Saving

  Income, Spending & Saving/dissaving

  • Consumption spending is that part of income spent on consumer goods and services
  • Savings are the part of income that is not spent
  • If an individual spends more than they earn, they will have to borrow money
  • Borrowing or negative saving is called dissaving.
• Marginal Propensity to Consume


  The proportion of every extra dollar consumed
• Marginal Propensity to Save


  The proportion of every extra dollar saved
• Variations with Age


  Consumption and savings behaviours move through several patterns.

  • Younger individuals receive lower levels of income due to lack of skills, experience and education
  • Leading to spending most of their income and saving very little
  • Once individuals begin working, income rises and they tend to consume less as they start saving and accumulating assets for retirement
  • In retirement, income is no longer earned, and individuals consume out of past savings and wealth or rely on government pension benefits
• Individual consumers either spend of save their income

  A variety of factors influence the decision about whether to spend or save.

  • Cultural factors
  • Future expectations
  • Tax policies
  • Credit availability
  • Age
  • Level of income
• In the economy as a whole, as income rises the level of saving increases


  As income rises, people tend to save a higher proportion of their income.

  • Consumers on lower incomes spend proportionately more of their disposable income than people with higher incomes
  • As income rises, people do not need to spend as much of their income on essential items
• Consumption Function

  The consumption function diagram shows the relationship between income and consumption for an individual. As income rises, so does the level of consumption.
• Consumption Function

  The consumption function expresses consumption function spending in terms of:

  • Autonomous consumption
  • Induced consumption