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What is the difference between induced consumption and autonomous consumption?

Modified on: 2018/07/12
A:

The first step to determining the difference between autonomous and induced consumption is to look at what each of these terms mean. The key difference between autonomous consumption and induced consumption lies in the factor of income.

Autonomous Consumption

Autonomous consumption is defined as expenditures taking place when disposable income levels are at zero. This consumption is typically used to fund consumer necessities, but causes consumers to borrow money or withdraw from savings accounts.

Autonomous consumption occurs most often when people are in dire straits and have no income, but still have expenses. Even if a person is broke, he still has basic needs such as food, rent, utilities, health expenses and car payments. When a consumer is in this situation, he is forced to spend more money than he earns, which results in dissaving. Even though their incomes are not necessarily at zero, these consumers are forced to spend all of their incomes as well as money they don't have just for necessities. As a result, they have no disposable income.

Induced Consumption

Induced consumption, on the other hand, differs in that the amount of consumption varies based on income. As disposable income rises, so does the rate of induced consumption. This process applies to all normal goods and services. For induced consumption, disposable income is at zero when induced consumption is at zero. As the value of disposable income rises, it induces a similar rise in consumption. Induced consumption demonstrates how people begin to enjoy more lavish lifestyles and spend more money as their wealth grows.


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