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Consumption

Consumption, defined as the acquisition of utility, is a major concept in economics and is also studied in many other social sciences. It is seen in contrast to investing, which is spending for acquisition of future income.

Different schools of economists define consumption differently. According to mainstream economists, only the final purchase of newly produced goods and services by individuals for immediate use constitutes consumption, while other types of expenditure -- in particular, fixed investment, intermediate consumption, and government spending, are placed in separate categories. Other economists define consumption much more broadly, as the aggregate of all economic activity that does not entail the design, production and marketing of goods and services (e.g. the selection, adoption, use, disposal, and recycling of goods and services).


Economists are particularly interested in the relationship between consumption and income, as modeled with the consumption function.

The Keynesian consumption function is also known as the absolute income hypothesis, as it only bases consumption on current income and ignores potential future income (or lack of). Criticisms of this assumption led to the development of Milton Friedman's permanent income hypothesis and Franco Modigliani's life cycle hypothesis.

The permanent income hypothesis is an economic theory attempting to describe how agents spread consumption over their lifetimes while the life cycle hypothesis is a model that strives to explain the consumption of individuals.

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