Autonomous Consumption vs. Induced Consumption: An Overview
The key difference between autonomous consumption and induced consumption lies in the factor of income. Those with little to no income will generally still have to spend money to live and that is considered autonomous consumption.
People with a great deal of disposable income produce induced consumption. These people have money to spend or invest, even after all basic needs are met and all necessary bills are paid.
- Autonomous or mandatory spending by the federal government includes Social Security and Medicaid.
- Autonomous consumption can change in response to life situations such as a move, the loss or gain of a job, or the changing of recreational habits.
- When a person has disposable income, the amount of his or her induced consumption is likely to grow.
- Induced consumption, like autonomous consumption, can shift with a person’s financial circumstances.
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 it 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, shelter, utilities, health care, and transportation. When a consumer is in this situation, they are forced to spend more money than they earn, which results in dissaving.
When a person uses debt instead of cash or savings to finance autonomous consumption it is also called "dissaving."
Such consumers are forced to spend all of their incomes as well as the money they don't have, just for necessities. As a result, they have no disposable income. Some people in these situations may end up in a spiral of debt and may have to take on high-interest payday loans to cover their basic bills for shelter or food.
Autonomous consumption can go up or down depending on foreseen or unforeseen events that may limit or take away income, or even shifts in a person's ability to borrow, like a plummeting credit score. There are actions people can take to make a change in their autonomous consumption, like moving to a cheaper location, giving up a car, or signing up for a lower-cost health plan.
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 the typical phenomenon of how expenditures increase as wealth grows: People begin to enjoy more lavish lifestyles, spending more often, making more purchases, and incurring greater expenses. When people have more disposable income, they are in a better position to save or invest money to be used as future income.