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Autonomous Consumption

The expenditures that a consumer needs to make, regardless of their income level

What is Autonomous Consumption?

Autonomous consumption refers to the expenditures that a consumer needs to make, regardless of their income level.

 

Autonomous Consumption

 

Certain goods and services must be purchased even when an individual is broke or with little to no disposable income. They include goods such as food, shelter (rent and mortgage), and hygiene products, and services such as utilities and healthcare. Since their utility in maintaining a basic standard of living is undisputed, the expenditures are considered to be independent, and hence autonomous, of the income earned.

 

Summary

  • Autonomous consumption refers to the expenditures that a consumer needs to make, regardless of their income level.
  • Autonomous consumption is different from discretionary consumption and induced consumption.
  • Disposable income is described as the income earned in excess of payment of taxes and other social security payments.

 

Autonomous Consumption vs. Discretionary and Induced Consumption

Autonomous consumption is thus different from discretionary consumption, which refers to the money spent on goods and services that are classified as non-essential items. However, the expenses allocated to discretionary consumption increase with an increase in income levels. Good quality food, vehicles are examples of discretionary expenses for households.

Autonomous consumption is also different from induced consumption, which fluctuates based on income levels. In a situation where the disposable income of a household increases, one is likely to observe a rise in the consumption level. Thus, there is no induced consumption when disposable income is zero. All kinds of normal goods and services can be classified as such.

 

What is Disposable Income?

Disposable income is described as the income earned in excess of payment of taxes and other Social Security payments. When times are hard, consumers are forced to dig into their household savings in order to afford their standard of living. In a situation where household savings are also low, most consumers end up increasing their debt in order to finance the expenses.

 

How does Autonomous Consumption Work?

The level of autonomous consumption for a particular individual or a household is not static.

  1. Although it is considered to be independent of income levels, it can shift as a result of events that may limit or eliminate sources of income, such as layoffs and pay cuts.
  2. The level of autonomous consumption can also shift as a result of changes in financing options. For example, higher interest rates increase the cost of credit, which can reduce the level of autonomous consumption in an economy.
  3. Other lifestyle changes, such as downsizing, changes in eating habits, or usage of utilities, can also impact the autonomous consumption level.

 

What is Dissaving?

Levels of autonomous consumption can help policymakers discern the saving trends in an economy. For example, in a situation where the autonomous spending within a sample, such as a community or certain segment of the population, exceeds the total income of all the individuals in that sample, the economy is said to demonstrate negative savings.

Negative savings is also known as dissaving, which points to an increase in money demand. Thus, individuals finance current spending by borrowing against their future income, either using credit cards, taking mortgages or car loans, or taking cash advantages.

Low levels of saving in the economy can also be a result of increases autonomous spending as opposed to current incomes. However, dissaving isn’t always the result of financial difficulties. For example, significant savings may go into discretionary expenses, such as college education, weddings, or purchasing a home.

 

Autonomous Expenditures for Governments

Government spending can also exert a significant impact on autonomous spending in an economy. For example, when governments increase allocation to programs such as Social Security and Medicare such that they function properly, the burden of payment of the individual is reduced. They are mandatory expenses, also known as autonomous expenditures for the government.

On the other hand, the government may also partake in discretionary expenditures, such as education programs, free public transport, etc. A well-functioning social welfare system usually leads to a boost in household savings.

 

More Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

Discretionary Expense

Non-Excludable Goods

  • Average Propensity to Consume (APC)

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