Autonomous Consumption Definition Formula Example

Autonomous Consumption Definition

Its basic level does not show a significant positive or negative correlation with income. It happens because an entity or consumer has to spend for it even if they do not have an adequate disposable income. If they fail to collect the money required to meet the necessities, they have to borrow or withdraw money from their savings.

Autonomous Consumption Explained

Autonomous consumption is the portion attributed to a household’s spending that is supported regardless of regular income. In the absence of stable income, citizens are compelled to fund it with borrowings or savings. It is because they are financing life-supporting activities or items which they are bound to arrange, pay and maintain first and foremost. There is no question of delay or arrangement in normal scenarios.

Key Takeaways

Autonomous consumption refers to the unavoidable consumption expenditure of an entity that cannot easily cut down based on a decline in income.Spending on it ensures the basic standard of living. If the disposable income is zero, it is financed using savings or borrowings.Examples include spending on essential expenses like food, rent, utilities, medicines, and mortgage payments.It is often contrasted with induced consumption and discretionary expenses. Induced consumption easily correlates positively with income, and discretionary income stimulates spending on vacations and luxuries.

Citizens from any class of society or income bracket will have basic needs and utility bills, but they may vary. However, households of every income class have to spend for their basic needs and bills independent of their income. Hence such expenditures are known as autonomous. However, the characteristics of components of autonomous expenditure can change in response to the rate of reduction or increase in cash inflow, amount of savings, or credit availability. For instance, with a drastic reduction in income and no savings left, people may decide to downsize the home and lower utility bills.

Several factors contribute to autonomous expenditure growth, like the potential for future cash inflow, ease of borrowing, asset base or savings, etc. The phenomenon is also linked to GDPGDPGDP or Gross Domestic Product refers to the monetary measurement of the overall market value of the final output produced within a country over a period.read more growth. For instance, various studies reveal that residential investment tends to be positively affected by GDP growth. At the same time, during phases like depression, there will be a large fall in autonomous spending. If autonomous consumption decreases, then it will push the aggregate demand curve down. As a result, the government will introduce an economic stimulus packageEconomic Stimulus PackageAn economic stimulus package is an attempt by any nation to stabilize the economy through monetary and fiscal policy expansion. It attempts to avert the economic slowdown, and getting out of recession by helping the private sector to recover and flourish, resulting in economic growth.read more and other measures to offset the autonomous spending decline.

It is always contrasted with induced consumption and discretionary consumption. The fraction of consumption that fluctuates with disposable incomeDisposable IncomeDisposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes.read more is induced consumption. When disposable income increases, induced consumption increases and vice versa. Unlike autonomous expenditure, induced expenditure can also drop to zero if the disposable income falls to zero. Similarly, people use discretionary income derived from disposable income to spend on luxuries like vacations and branded products.

Formula

The autonomous consumption formula is derived from a linear function for consumption. The consumption function explains that if the income increases, consumption also increases, given the marginal propensity to consumeMarginal Propensity To ConsumeMarginal Propensity to Consume refers to the increase in consumption owing to the increment in disposable income. It is determined as the ratio of change in consumption (ΔC) to change in disposable income (ΔI). read more is not declining. On the other hand, if the marginal propensity to consume falls with an increase in income, the consumption function will become nonlinear.

C = a +bY

C:Consumption functiona: Level of autonomous consumptionb: Marginal propensity to consume out of incomeY: Income

Or:

C = A + MPC×Yd

C: ConsumptionA: Autonomous consumptionMPC: Marginal propensity to consume from disposable income Yd

Example

To understand better, let us take another autonomous consumption example:

Lisa had a job with a fair salary. She lived in a small apartment for rent. She paid for all her necessities like food, rent, utilities, healthcare, and mortgage payments on time and non-essential goods and services utilizing her disposable income.