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Consumption means using up of goods and services to satisfy human wants. It also means using not of matter but of utilities contained in goods and services to satisfy human wants.
Consumption plays a very important role in the development of the country. Role of consumption determines the rate of economic development of a country.
It determines the level of income, employment, standard of living of the country. Employment and standard of living also increases and vice versa.
There are 3 types of Consumption.
- Direct consumption/ Final Consumption:
When a commodity or service is directly used to satisfy human want it is called direct consumption.
It involves the consumption of consumer goods.
Ex: Services of doctors, teachers, food items, books, etc.
- Indirect consumption/Productive consumption:
When goods and services satisfy human wants indirectly then they are known as indirect consumption.
Ex; use of machines.
Use of producers’ goods/capital goods/Investment goods is called as indirect consumption.
- Wasteful consumption/Destructive consumption:
When a thing is destroyed accidentally by floods, earthquakes, fire, natural accidents and other calamities is known as wasteful consumption.
It also means destruction of utilities contained in goods and services for the satisfaction of human wants. Destruction of utility may be quick or gradually. It is quick in case of single use of goods.
Ex: food items.
It is gradual in case of multiple use of goods
Ex Desk, table etc.
More destruction of utility cannot be considered as consumption.
The extensive studies of family budgets shows that though different income groups of people spend in different way there is a remarkable similarity in the general pattern of consumption
Engel’s Law of Family Expenditure/Engel’s Law of Consumption.
Ernest Engel was a German satisfaction, in the year 1857 conducted study on consumption. He studied consumption patterns of different income groups and collected information on family budgets of working class, middle class and rich class people and framed 3 rules on family expenditure. These rules are known as Engel’s Law of family expenditure or Engel’s Law of Consumption.
It is applicable to all the sections of the society.
The law states that,
- Whenever the income of the consumer increase the proportion of income spent on food decreases.
- Whenever the income increases the proportion of income spent on clothing, fuel, light and rent remains the same.
- Whenever the income increases the proportion of income spent on comforts of life such as education, health, recreation tends to increase.
Thus the smaller the family income the greater the proportion of it absorbed by food and other elementary necessities and greater the family income, the higher the proportion spent on comforts and luxuries.
Engel;s law holds true to certain limits but with the passage of time, this need to improvement due to the modernization and changes in the family needs.
For eg: now a day the prices of housing (both constructing and renting) have extremely gone up without a proportional increase in income.
Therefore it becomes very difficult to acquire a house according to percentage of income as given by Engel. Further, the Engel’s destruction of income does not emphasize on savings which is very necessary for every family as saving alone can serve an effective and practical source for meeting the emergency’s expenditure.
Therefore Engel’s law needs frequent changes and can be modified according to one’s own requirements.
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