See also REVEALED PREFERENCE THEORY, PRICE EFFECT, INCOME EFFECT, SUBSTITUTION EFFECT, ECONOMIC MAN, CONSUMER RATIONALITY, PARETO OPTIMALITY.
Fig. 30 Consumer equilibrium. The optimal combination of Good X and Good Y is at point E when the BUDGET LINE is tangential to indifference curve 1. At this point the slope of the budget line (the ratio of prices) is equal to the slope of the indifference curve (the ratio of marginal utilities), so the goods’ marginal utilities are proportional to their prices.
consumer goods any products, such as washing machines, beer, toys, that are purchased by consumers as opposed to businesses. Compare CAPITAL GOODS, PRODUCER GOODS.
consumerism an organized movement to protect the economic interests of CONSUMERS. The movement developed in response to the growing market power of large companies and the increasing technical complexity of products. It embraces bodies such as the Consumers’ Association in the UK, which is concerned with product testing and informing consumers through publications such as Which? Consumerism has been officially incorporated into British COMPETITION POLICY since the 1973 FAIR TRADING ACT. See CONSUMER PROTECTION.
consumer nondurables CONSUMER GOODS that yield up all their satisfaction or UTILITY at the time of consumption They include such items as beer, steak or cigarettes. Compare CONSUMER DURABLES.
consumer price index (CPI) a weighted average of the PRICES of a general ‘basket’ of goods and services bought by consumers. Each item in the index is weighted according to its relative importance in total consumers’ expenditure (see Fig. 31). Starting from a selected BASE YEAR (index value = 100), price changes are then reflected in changes in the index value over time. Thus, in the case of the UK’s CPI, the current base year is 1996 = 100; in February 2005 the index value stood at 112.2, indicating that consumer prices, on average, had risen 12% between the two dates.
Since December 2003 the CPI has been used by the UK government as a measure of the rate of INFLATION in the economy for the purposes of applying macroeconomic policy in general and monetary policy in particular (see MONETARY POLICY COMMITTEE). Previously, the RETAIL PRICE INDEX (RPI) was used for this purpose, but the CPI measure was adopted to harmonize the way the UK measured its inflation rate with that of other countries in the EUROPEAN UNION.
consumer protection measures taken by the government and independent bodies such as the Consumers’ Association in the UK to protect consumers against unscrupulous trade practices such as false descriptions of goods, incorrect weights and measures, misleading prices and defective goods. See TRADE DESCRIPTIONS ACT 1968, WEIGHTS AND MEASURES ACT 1963, CONSUMER CREDIT ACT 1974, PRICE MARKETING (BARGAIN OFFERS) ORDER 1979, OFFICE OF FAIR TRADING, COMPETITION POLICY, CONSUMERISM.
Fig. 31 Consumer price Index. Source: Office of National Statistics.
consumer rationality or economic rationality the assumption, in demand theory, that CONSUMERS attempt to obtain the greatest possible satisfaction from the money resources they have available when making purchases. Because economic theory tends to sum household demands in constructing market DEMAND CURVES, it is not important if a few households do not conform to rational behaviour as long as the majority of consumers or households act rationally. See ECONOMIC MAN.
consumer sovereignty the power of CONSUMERS to determine what is produced since they are the ultimate purchasers of goods and services. In general terms, if consumers demand more of a good then more of it will be supplied. This implies that PRODUCERS are ‘passive agents’ in the PRICE SYSTEM, simply responding to what consumers want. In certain kinds of market, however, notably, OLIGOPOLY and MONOPOLY, producers are so powerful vis-à-vis consumers that it is they who effectively determine the range of choice open to the consumer. See REVISED SEQUENCE.
consumers’ surplus the extra satisfaction or UTILITY gained by consumers from paying an actual price for a good that is lower than that which they would have been prepared to pay. See Fig. 32 (a). The consumers’ surplus is maximized only in PERFECT COMPETITION, where price is determined by the free play of market demand and supply forces and all consumers pay the same price. Where market price is not determined by demand and supply forces in competitive market conditions but is instead determined administratively by a profit-maximizing MONOPOLIST, then the resulting restriction in market output and the increase in market price cause a loss of consumer surplus, indicated by the shaded area PPmXE in Fig. 32 (b). If a DISCRIMINATING MONOPOLIST were able to charge a separate price to each consumer that reflected the maximum amount that the consumer was prepared to pay, then the monopolist would be able to appropriate all the consumer surplus in the form of sales revenue.
Business strategists can use the concept of the consumers’ surplus to increase the firm’s profit (see VALUE-CREATED MODEL). To illustrate: you are a Manchester United football fan; tickets for a home game are currently priced at £50 but you would be willing to pay £75. Hence, you have ‘received’ as a consumer ‘perceived benefit’ or ‘surplus’ of £25 over and above the price actually charged. Manchester United, however, instead of charging a single price of £50 could segment its market by charging different prices for admission to different parts of the ground (see PRICE DISCRIMINATION, MARKET SEGMENTATION) in order to ‘capture’ more of the consumers’ surplus for itself. Thus, it could continue to charge the ‘basic’ price of £50 for admission to certain parts of the ground, £75 for seating in the main stand and £120 for an ‘executive box’ seat. Compare PRODUCERS’ SURPLUS. See DIMINISHING MARGINAL UTILITY, DEADWEIGHT LOSS.
Fig. 32 Consumers’ surplus. (a) At the EQUILIBRIUM PRICE OP, utility from the marginal unit of the good is just equal to its price; all previous units yield an amount of utility that is greater than the amount paid by the consumer, insofar as consumers would have been prepared to pay more for these intramarginal units than the market price. The total consumer surplus is represented by the shaded area PEP1 (b)The loss of consumers’ surplus because of monopoly.
consumption the satisfaction obtained by CONSUMERS from the use of goods and services. Certain CONSUMER DURABLE products, like washing machines, are consumed over a longish period of time, while other products, like cakes, are consumed immediately after purchase. The DEMAND CURVE for a particular product reflects consumers’ satisfactions from consuming it. See WANTS, DEMAND.
consumption expenditure the proportion of NATIONAL INCOME or DISPOSABLE INCOME spent by HOUSEHOLDS on final goods and services. Consumption expenditure is the largest component of AGGREGATE DEMAND and spending in the CIRCULAR FLOW OF NATIONAL INCOME. It is one of the most stable components of aggregate demand, showing little fluctuation from period to period.
In 2003, consumption expenditure accounted for 52% of gross final expenditure (GFE) on domestically produced output (GFE minus imports = GROSS DOMESTIC PRODUCT). See Fig. 132 (b), NATIONAL INCOME ACCOUNTS. See CONSUMPTION SCHEDULE, VEBLEN EFFECT.
consumption function a statement of the general relationship between the dependent variable, CONSUMPTION EXPENDITURE, and the various independent variables that determine consumption, such as current DISPOSABLE INCOME and income from previous periods and WEALTH. See CONSUMPTION SCHEDULE, LIFE-CYCLE HYPOTHESIS, PERMANENT-INCOME HYPOTHESIS, WEALTH EFFECT.
consumption
