Let us make an in-depth study of Consumption of Utilities:- 1. Meaning of Consumption 2. Characteristics of Consumption 3. Classification 4. Importance 5. Engel’s Law of Consumption.
Meaning of Consumption:
Consumption means using up of utilities. For example – when we take a glass of water to quench our thirst, we are said to consume water.
Whenever we make use of any commodity or service for the satisfaction of our wants, the act is called consumption.
Therefore, by consumption we mean the satisfaction of our wants by the use of commodities and services.
Economists have defined consumption as “the destruction of utility”. When a man eats an apple, he does not destroy the matter of which it is composed; he has only changed its form. Man has destroyed its utility in the act of eating it. Production is “Creation of Utility” Marshall has called it Negative Production and has defined as such—”Consumption may be regarded as negative production.”
According to Prof. Ely – “Consumption in its broadest sense means the use of economic goods and personnel services in the satisfaction of human wants.”
Prof. A. L. Mayers has said – “Consumption is the direct and final use of goods or services in satisfying the wants of human beings.”
Characteristics of Consumption:
The important characteristics of consumption are as follows:
1. Destruction of Utility:
Science has proved this fact that man is neither the creator of any article nor he is destroyer of any article. By the use of the article the utility of the article is destroyed. The form of the article is changed.
2. Satisfaction of Human Wants:
By consumption we must have satisfaction of human wants. If satisfaction is not achieved it cannot be called consumption.
If a small child takes away the radio and breaks it, then we cannot say that utility from radio has been derived.
3. Direct Satisfaction of Wants:
By consumption of any article people must get satisfaction from the article directly.
If one is thirsty—taking a glass of water to satisfy thirst is direct consumption. If hungry taking a bread to satisfy hunger is an example of direct satisfaction.
4. The Reduction of Utility can be Rapid or it can be Slow:
The utility of an article diminishes slowly and gradually.
Using of scooter; or use of television.
5. Consumption of Services:
There is consumption not of goods only but also of services.
Coaching to students by teacher; to treat patients by doctors.
Difference between Consumption and Waste:
The important difference between consumption and waste are:
(1) By consumption a man derives utility and satisfaction from that article. While in waste the goods is destroyed and man do not receive any satisfaction.
(2) So, long a man has not derived utility and satisfaction from that article it may be treated as waste. For example — Wood lying may be treated as waste but when used to prepare food it may come in the category of consumption.
Classification of Consumption:
Following are the important classification of consumption:
1. Single Use and Durable Use Consumption:
The commodity which can be used for once only is known as single use consumption. For example—Milk, curd, butter etc. and the commodity which is destroyed by the regular use and after some time is consumed is known as durable use consumption.
Radio, Pencil, Shirt etc.
2. Quick Consumption and Slow Consumption:
The goods whose use is finished quickly is known as Quick consumption.
Drinking of milk, eating bread etc. In this the utility is destroyed immediately. In other way the goods whose consumption takes place slowly and gradually is known as slow consumption. For example—Use of Television; Use of Scooter etc.
3. Productive and Unproductive Consumption:
When any commodity is used for further production then it is called production consumption.
Coal used in factory for further production. This is called “Indirect Consumption”. On the other side when any commodity is used for meeting personal necessary it is called unproductive consumption. For example: use of food-stuff to satisfy hunger.
4. Productive and Final Consumption:
When any commodity is used for further production of goods then it is called production consumption. For example—Coal used in factory to run machine when any commodity is used directly to satisfy needs it is called final consumption. This is also called negative production.
Wheat used for eating. Coal used for heating the room.
5. Present Consumption and Postponed Consumption:
When any commodity is used for present consumption then it is called present consumption.
When a man purchases a pair of shoe for Rs. 200/- with his income of Rs. 400/- then it is called present consumption.
When a man saves or keeps Rs. 4,000/- for further production of any article it is called postponed consumption.
Importance of Consumption:
The base of all economic activities is consumption. Without consumption there cannot be production, exchange and distribution. Therefore, in economic consumption has much importance.
The importance of consumption can be divided under two heads:
1. Theoretical Importance of Consumption, and
2. Practical Importance of Consumption.
Theoretical Importance of Consumption:
The theoretical importance of consumption can be discussed in the following manner:
1. Consumption in both beginning and end of economic activities:
The desire to satisfy necessaries of the life gives birth to economic activities. Consumption is that point around which all economic activities clusters.
Prof. Marshall has written:
“Consumption is the sole end and purpose of all production.” Further Benham has said—”To satisfy all the necessaries of human life the efforts to produce all types of goods in an attempt of economic activities.” Prof. T. H. Pension has also accepted this fact that “Consumption is the beginning and end of economic activities of human being.” To satisfy the necessaries of life production of wealth is very essential.
2. Consumption is the index of welfare and development of the nation:
Economists accept this fact that consumption is the index of welfare and development of the country. The developed nations are economically sound and their standards of living are above average.
3. Consumption creates the opportunity of employment and affects economic development:
In a country if there is more of consumption of any article, the production of that article will increase and increase in production will give employment to people. Increase in production means, increase in income and employment opportunities. This helps in developing the economy of the country.
4. Consumption is the base of production:
The assessment of a country’s development can be made by seeing the standard of living of the people of that country. The comparative study between the economy of two countries can be studied by seeing the consumption and production capacity of the people of that country.
5. Exchange activities also depend upon consumption:
More exchange activities of a country is entirely depended upon the consumption capacity of the people of that country. If there is no consumption of any article then the production and exchange of that article will not take place.
6. Consumption is the motivating force of distribution:
This has been accepted by economists that consumption works as motivating force of distribution. People want income because they have to go for consumption. If the various factors of production will not get proper remuneration, they will not be able to satisfy their necessary desire and ultimately they will have to close down the production.
Practical Importance of Consumption:
Consumption has not only theoretical importance but it has got practical importance also.
As its practical importance following class of people derive much importance:
1. Advantages to Heads of Families:
Its study is more useful and helpful to the people in preparing the Family Budget. The income of the head of the family is limited but the wants and desires are unlimited. The Engel’s Law of Consumption study helps a lot to the heads of the families as how to meet the various needs and desires with limited resources. Here the applicability of law of Equimarginal Utility helps a lot.
2. Advantages to Producers:
For producer study of consumption has special importance. Demand forecasting is basis of consumption study. If the demand forecasting will be incorrect producer may have to suffer a lot.
3. Advantages to Businessmen:
The study of consumption helps businessmen in earning more profit. Businessmen study the taste, likings, fashion of consumers and produce goods accordingly. They keep themselves away from over-production.
4. Advantages to Monopolists:
The main aim of monopolist is to earn more profit and the monopolists create such situation, so that maximum profit can be earned. But the monopolists cannot charge always high price because the fear of consumer-surplus can come up.
5. Advantages to Finance Minister:
In any country the study of consumption helps finance minister in planning the development of the country. This helps in the levy of various taxes over the goods.
6. Advantages to Workers:
The study of consumption helps labourers and workers in making demand of their remuneration for the work. Proper remuneration can be demanded by the workers.
7. Advantages to Government:
By study of consumption government may be able to ascertain the tax-paying capacity of the workers. The economic development of the country can be planned. Heavy taxes can be levied on injurious goods which will help people incoming in the clusters of various types of diseases.
Engel’s Law of Consumption:
Engel’s law of consumption is a famous conclusion of family’s budget drawn by Dr. Ernest Engel’s, a German Economist in the year 1857. This law states that people of low income group spend more money on food materials and less money is left out to meet the other expenses of life. On the other-hand, the people having more income spends comparatively less money on food materials and more money on other items of life.
Therefore, from the study of Engel’s Law of Consumption, following important inferences can be drawn:
(1) As the income of any family increases the percentage of expenditure on necessaries of life decreases and vice-versa.
(2) Whatever may be the income, the percentage of expenditure on house, clothes, fuel and light remains practically the same.
(3) Further, percentage expenditure on luxuries and other cultural and recreational wants increases with an increase in income and decreases when income decreases.
(4) When income of any family increases, the expenditure on the items of education, health, entertainment increases proportionately.
Further, it should be noted carefully that it is increase or decrease in expenditure which is situated under this law and not the total amount of expenditure. A rich man will definitely spends a major share of total sum on food and other necessaries of life but the percentage expenditure on food stuff etc. is less.
This law has become a law of universal applicability and it applies in India also. The percentage of expenditure may slightly vary but these conclusions broadly hold good. It is true that a very large percentage of small incomes goes into the purchase of the bare necessaries of life, where as people having large incomes spend a small percentage of their income on such things. In the case of expenditure on luxuries goods, the case is quite contrary and opposite. Therefore, in the Indian financial context the position of Engel’s Law of Consumption has got very important position.