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Theories of Consumption

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  • Drakopoulos, Stavros A.

Abstract

This chapter explains the role of consumption expenditures in modern economies and their significance for the determination of the level of output and employment in an economy. It starts with a presentation of the theory of intertemporal choice that forms the basis of mainstream consumption functions. Next, it discusses Keynes’s approach to consumption, and particularly his criticism of the standard model of consumer behaviour, his emphasis on the role of consumption for the level of employment, and his analysis of aggregate consumption patterns. It also describes the main mainstream theories of consumption, which are the life cycle income hypothesis, the permanent income hypothesis and the random walk theory of consumption. Finally, the chapter explores the heterodox approaches to consumption, focusing mainly on the relative income hypothesis. Additionally, it shows the consequences of consumption theories for the effectiveness of economic policies towards unemployment and economic downturns.

Suggested Citation

  • Drakopoulos, Stavros A., 2021. "Theories of Consumption," MPRA Paper 108215, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:108215
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    File URL: https://mpra.ub.uni-muenchen.de/108215/1/MPRA_paper_108215.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jimmy Alani, 2022. "Estimation of Consumption Functions Using Savings Motive Hypothesis (SMH)," International Econometric Review (IER), Econometric Research Association, vol. 14(1), pages 21-45, March.

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    More about this item

    Keywords

    Consumption expenditure; Fiscal policy; Keynesian consumption function; Life-cycle income hypothesis; Permanent income hypothesis; Relative income Hypothesis;
    All these keywords.

    JEL classification:

    • B0 - Schools of Economic Thought and Methodology - - General
    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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