Autonomous consumption is defined as the expenditures that consumers must make even when they have no disposable income. Certain goods need to be purchased, regardless of how much money is coming in. When times are hard, paying for these necessities can force consumers to borrow or tap into savings.
Understanding Autonomous Consumption
Autonomous consumption generally occurs when people are in dire straits, accumulating expenses with no income to pay for them. Even if a person is broke, he or she still needs certain things, such as food, shelter, utilities, and health care. These expenses cannot be eliminated, regardless of limited personal income, and, as a result, are deemed autonomous or independent.
Autonomous consumption contrasts with discretionary consumption, a term given to goods and services that are considered non-essential by consumers, but desirable if their available income is sufficient to purchase them.
How Autonomous Consumption Works
If a consumer's income were to disappear for a time, he or she would have to either dip into savings or increase debt to finance essential expenses.
The level of autonomous consumption can shift in response to events that limit or eliminate sources of income, or when available savings and financing options are low. This can include downsizing of a home, changing eating habits, or limiting the use of certain utilities.
Dissaving, the opposite of saving, refers to spending money beyond one's available income. This can be achieved by tapping into a savings account, taking cash advances on a credit card, or borrowing against future income via a payday or regular loan.
Also referred to as negative saving, dissaving can be examined on an individual level or on a larger economic scale. If the autonomous spending within a community or population exceeds the cumulative income of the included individuals, the economy has negative savings and is likely taking on debt to finance expenses.
A person does not need to experience financial hardship for dissaving to take place. For example, a person may have significant savings to pay for a major life event, such as a wedding, to use the accrued funds for a discretionary expense.
Governments allocate their available funds to mandatory, autonomous expenditures or discretionary expenses. Mandatory, or autonomous, expenditure includes funds mandated for specific programs and purposes that are considered necessary for the nation to function properly, such as Social Security, Medicare, and Medicaid.
In contrast, discretionary funds can be directed to programs that provide value to society but are not considered critical. Discretionary funds typically support programs related to certain defense activities, education, and transportation programs.
Autonomous Consumption vs. Induced Consumption
The difference between autonomous consumption and induced consumption is that the latter should fluctuate depending on income.
Induced consumption is the portion of spending that varies depending on disposable income levels. As the value of disposable income rises, it is expected to induce a similar rise in consumption. People in this situation are likely to spend more money on living lavishly, making more purchases, and incurring greater expenses.