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Key Terminology

Consumption (C): Household spending on final goods and services.

Aggregate Demand: Total spending in the economy.

Autonomous Consumption: Consumption at zero income.

Induced Consumption: Consumption that depends on income.

Marginal Propensity to Consume (MPC): Change in consumption due to change in

income.

Average Propensity to Consume (APC): Ratio of consumption to income.

Saving (S): Income not spent on consumption.

Marginal Propensity to Save (MPS): Change in saving due to change in income.

1. Meaning of Consumption

Consumption refers to spending by households on goods and services to satisfy needs

and wants. In macroeconomics, consumption is the largest component of aggregate

demand and plays a central role in determining the level of national income and
economic activity. It includes all final purchases made by households for current use.

Consumption is considered a stable and predictable component of the economy

compared to investment, which is more volatile. Because households consume

regularly, consumption provides continuity and stability to economic activity.

2. Consumption in Macroeconomic Activity

Consumption directly affects production, employment, and income. When households

increase consumption, firms respond by increasing production, which leads to higher

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