Autonomous consumption is the level of customer’s expenditures that have to be made if there is zero income. Even when people have no disposable income, they still need to buy food, pay for electricity, or rent a flat. Under such circumstances, they start borrowing or spending money from their savings accounts.
Explanation:
The level of consumption generally depends on income. Namely, the more consumers earn, the more they tend to spend. Contrariwise, if the income goes down, so does the consumption. However, consumption level cannot decrease to zero even if a person or a business does not earn at all. There is still the need to pay for food, shelter, and healthcare. Such consumption that occurs regardless of the disposable income is expressed through the autonomous consumption definition. Autonomous consumption is the minimum expenditure a consumer has to pay to cover one’s basic needs, such as food or bills. For the consumers who have some level of income, autonomous consumption can be calculated as a part of total expenditure. The situations when people lose their ability to work due to some long-lasting illness and have zero earnings are examples of autonomous consumption as they still have their basic needs.
The terms ‘Autonomous consumption’ and ‘Induced consumption’ are often mentioned together as they are the constituent parts of the total consumption level. Induced consumption is the level of expenditures made after all the basic needs are met. Induced consumption is part of spending that changes according to the level of disposable income. For example, if a person has extra money after buying food and paying bills, he or she can either save the money or spend it. Even if people prefer to save money, they still tend to spend some part of it on unnecessary products and services. For example, they can afford to go on vacation or even choose essential products of higher quality. Those economic choices are called ‘Discretionary expense,’ which consists of all the money spent on non-essential products.
There is a simple way in consumer economics that explains how to calculate autonomous consumption when the consumption level is known. The formula is C = A + MD, where C stands for total consumption, A for autonomous, M signifies marginal propensity to consume, and D stands for disposable income. After a simple transformation, one can get an autonomous consumption formula, which is: A = C – MD. The autonomous consumption graph visually illustrates how it works. The linear function shows how consumption (C) grows related to the income level. However, the line does not begin from a zero point, it starts on a certain height on the y-axis, which is the level of autonomous consumption, and the graph cannot go any lower. The 45-degree line is drawn to identify the point (E) where the level of income equals the level of expenditures, so if the income is higher than l, the consumer saves money.
The consumption economy is an extensive part of microeconomics that explains how the levels of income and consumption correlate. The importance of autonomous consumption for this field of study is that it helps to assess the level of expenditures that cannot be cut or eliminated. It is necessary for the companies, as well as for individuals, to know this level to be able to evaluate the risks of bankruptcy or dissaving.