Induced Consumption

Economics

Introduction

Consumption patterns of individuals differ according to income. This is natural because when people have more income, their disposable income rises. Therefore, the consumers who earn more tend to make more purchases. Such incomes increase production and demand in a market.

Definition: Induced Consumption

Induced consumption is the consumption made with disposable income. Usually, when people have more disposable income, they spend more on a variety of items that are not usually necessary for a living. The induced consumption starts when people start to gain disposable income. So, when disposable income is nil, induced consumption is at zero.

People tend to buy lavish items and luxury goods when their income reaches a certain level beyond the necessary income required for a living. This extra income lets people buy products at a high rate. People who are prone to induced income are often those who are rich.

People below or on the poverty line cannot afford to consume items that are highly-priced because their income is insufficient. On the other hand, people with sufficient income tend to buy the pricier items which are known as induced consumption.

The opposite of induced consumption is autonomous consumption, which is the consumption that is necessary for a living. Autonomous expenditure is not lavish and it is unavoidable to ignore such consumption. Autonomous consumption is not made with disposable income.

Example of Induced Consumption

As induced consumptions include items that are made with disposable income. often Induced consumptions always include items that are lavish in nature.

Examples may include a new vehicle, a new home, expenditures on dining out, and buying expensive gifts. Entertainment expenditures are also considered to be induced consumption expenditures.

The point to note while exploring the examples of induced consumption is that an individual won’t buy these items when he has no disposable income. The individual will purchase those items first that is necessary for living, such as food, energy, and education. However, when his income rises and crosses a certain level, he would tend to purchase these goods with the extra income in his hand.

Therefore, disposable income is a producer of induced consumption. When people have disposable income they feel more confident about earning the spent money again. So they do not refrain from spending money on items that are not necessary for living. It must be noted that the income of individuals rises with the national income level. So, induced consumption may mean that the national levels of income may have increased too.

How Does Induced Consumption Work?

The methodology of work of induced consumption is simple. When there is a rise in income, people have extra money to spend on various items apart from the ones that are extremely necessary.

  • First, people would buy items that cannot be avoided for a living. Such expenditures are known as autonomous consumption. Governments usually support autonomous consumption by virtue of many projects and programs.

  • When people meet all the necessary expenditures and still have money in their hands to buy additional goods, they will tend to spend the extra income. This usually happens when national incomes rise, giving rise to individual incomes as well.

  • When income levels cross a certain level, people tend to buy items that are considered induced. This type of consumption is called induced consumption.

  • So, for induced consumption to work, the income levels of individuals must rise. Without an increment in income, no one will get engaged in additional buying.

However, since it is natural to spend when there is disposable income, people tend to incur induced consumption with the extra money they have in their hands.

Effects of Induced Consumption

Induced income increases the demand for lavish goods and products

Induced income increases the demand for lavish goods and products in the market. As individuals can spend high amounts to buy these goods, producers compete for maximum prices by adding innovation to their products. Therefore, induced consumption increases the quality of the products as well.

More investment in products and services by consumers

Induced consumption may lead to more investment in products and services by consumers. This leads to the prosperity of producers and well-established brands. With the increase in consumption of lavish and branded items, the opportunity for manufacturers to establish a brand increases, so it provides an opportunity for new players to establish a brand for themselves.

Results in the overall prosperity of the market

Induced consumption leads to the overall prosperity of the market. For example, in order to use the lavish items bought from the market, additional purchases of other items may be necessary. For example, if someone buys an automobile, he will need petrol to run the car. This improves the overall prosperity of the market.

Results in more job creation

Induced consumption may also support the job market by adding new jobs to support the market of lavish buyers. As people throng newer shops, manpower requirements may go up. This may create newer job opportunities. So, induced consumption can create additional jobs indirectly.

Leads to the profitability of the brands

Induced consumption often leads to the profitability of the brands. As profits increase, the companies invest in newer projects. This helps the economy to run well. The profitability may also be noticed in the case of autonomous consumption, but it is more prevalent in the case of induced consumption.

Mark of positive progress of an economy

Induced consumption is a sign of opulence of an economy. As more people have extra or disposable income, their lifestyles, and modes of living become better. This leads to better welfare of the society. People also prosper in an economy where induced consumption takes place. So, induced consumption is a mark of positive progress.

Conclusion

Induced consumption is a natural phenomenon. With the advent of technologies going mainstream, induced consumption has only gone up. Now, there are many channels to get engaged in induced consumption and the process of induced consumption is increasing at a rapid rate with globalization as it offers more wealth to an increasing population.

Induced consumption is a common feature of developed economies, but recently developing economies, such as India have also seen a rise in the phenomenon of induced consumption. As investments in these economies are growing, people are having better opportunities and incomes. This is helping these countries to engage more in induced consumption.

FAQs

1. Is induced consumption a good sign for an economy?

Ans. Yes. Induced consumption occurs when people have more money in their hands. They are able to make better purchases and both people and companies prosper due to the process.

The induced competition also leads to competition between manufacturers and companies to provide innovative products to consumers. This helps in the betterment of the quality of items. Overall, induced consumption helps economies to prosper and let individuals have more freedom to buy better products.

2. What is the most prominent difference between autonomous and induced consumption?

Ans. The most prominent difference is that autonomous consumption does not vary with income but induced consumption varies with changing income patterns. This happens because autonomous consumption is related to the core-consumption patterns of individuals which remain more or less the same over time. However, induced consumption grows when people get more disposable income.

3. What is the main criticism of induced consumption that is prevalent in developing nations?

Ans. In developing nations only a fraction of the population is opulent. So, most part of the population cannot engage in induced consumption.

Therefore, most of the population is disappointed and confused due to a certain group of people engaging in induced consumption. This is also a reason for social disharmony.

raja
Updated on 13-Oct-2022 11:19:47

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