1.) John Maynard Keynes and The Consumption of recession.

Keynes's enduring legacy lies in the

recognition of government's role in economic well-being,
Function sparking ongoing discussions about the extent and
methods of governmental intervention in shaping
John Maynard Keynes (1883–1946) was an early economic outcomes.
20thcentury British economist, best known as the founder
Consumption Function
of Keynesian economics and the father of modern
macroeconomics, the study of how economies—markets In economics, the consumption function describes a
and other systems that operate on a large scale— behave. relationship between consumption and disposable income.
The consumption function was introduced by British
Born into a middle-class family, he received scholarships
economist John Maynard Keynes, who argued the function
to two of the most elite schools in England, Eton College
could be used to track and predict total aggregate
and Cambridge University, where he earned an consumption expenditures. It is a valuable tool that can be
undergraduate degree in mathematics in 1904. used by economists and other leaders to understand the
Throughout his academic career, he excelled at
economic cycle and help them make key decisions about
mathematics—and he had almost no formal training in
investments as well as monetary and fiscal policy.
economics.
Also called the Keynesian consumption function, it tracks
Keynes' father was an advocate of laissez-faire the proportion of income used to purchase goods and
economics, an economic philosophy of freemarket
services. Put simply, it can be used to estimate and predict
capitalism that opposes government intervention.
spending in the future. The classic consumption function
However, after the 1929 stock market crash triggered the suggests consumer spending is wholly determined by
Great Depression, Keynes came to believe that
income and the changes in income. The idea is to create a
unrestricted free market capitalism was essentially
mathematical relationship between disposable income and
flawed and needed to be reformulated, not only to consumer spending, but only on aggregate levels.
function better in its own right but also to outperform
competitive systems like communism. The Bottom Line; John Maynard Keynes is often credited
as being the father of modern macroeconomics. His branch
As a result, he began advocating for government
of economics, called Keynesian economics, suggested that
intervention to curb unemployment and correct economic demand was the driving force of any economy. He also
recession. In addition to government jobs programs, he introduced the idea of the consumption function, which
argued that increased government spending was
explains the relationship between a
necessary to decrease unemployment— even if it meant
a budget deficit. country's income and spending. According to the theory,
spending is sensitive to the level of income. So spending
What is Keynesian Economics? will increase when income does. Economists and leaders
The theories of John Maynard Keynes, known as can use this theory to help make predictions about future
Keynesian economics, center around the idea that spending and important economic and investment decisions
governments should play an active role in their countries' for the future.
economies, instead of just letting the free market reign.
CONSUMPTION PUZZLE
Specifically, Keynes advocated federal spending to
mitigate downturns in business cycles. The Consumption Puzzle refers to a phenomenon in
macroeconomics where changes in income do not lead to
Basic Principles of Keynesian Economics Demand—not equivalent changes in consumption. Specifically, the puzzle
arises from the observation that changes in income explain
supply—is the driving force of an economy.
only a small fraction of the variation in consumption over
Consumption (spending) is the key to economic recovery. time.

These two principles are the basis of Keynes' belief that KUZNET CONSUMPTION PUZZLE
demand is so important that, even if a government has to
Kuznet is actually a name came from Simon Kuznet. Simon
go into debt to spend, it should do so. According to
Kuznet was a Noted American economist who conducted
Keynes, the government boosting the economy in this
empirical studies regarding consumption of the US
way will stimulate consumer demand, which in turn spurs
economy for the period 1869-1938. His study was based on
production and ensures full employment.
a cross-section of household budget data over long term
The Bottom Line; John Maynard Keynes, a pivotal time-series data.
figure in 20th-century economics, introduced
revolutionary ideas that greatly impacted post-World War JOHN MAYNARD KEYNES
II economies. Despite facing criticism in the 1970s,
Keynes represented the consumption function as ‘C = a +
Keynesian economics experienced a resurgence in the
bY’ , stating that even at zero income level there will be
2000s and continues to be a topic of debate today. Central
certain consumption financed by dissavings or borrowings.
to Keynesian theory is the belief that government
Thus the average propensity to consume would also reduce
intervention, particularly through increased spending to
as income rose. He created the Keynesian Consumption
stimulate demand, is crucial for pulling an economy out
Function to model how people spend their money, and what 1. Brand loyalty: Some consumers prefer to purchase
happens to Consumption when Income increases. products from a specific brand that they trust and have had
positive experiences with in the past.
TWO THEORIES
2. Price sensitivity: Some consumers prioritize
• Franco Modigliani’s Life-Cycle Theory of finding the best deal or the lowest price when making
Consumption purchasing decisions.
• Milton Friedman’s Permanent Income Theory
3. Quality: Other consumers may prioritize the quality
Franco Modigliani’s Life-Cycle Theory of
of a product over price, opting for higher-end or premium
Consumption
products.
• According to Franco Modigliani, the income 4. Convenience: Some consumers value convenience
varies systematically over the phases of a and may prefer products or services that are easily
consumers “life cycle” so consumers make accessible or save them time.
plans to smooth lifetime consumption. As a
consumer grows older they save more of their 5. Environmental sustainability: Increasingly,
income for retirement. consumers are showing a preference for products and
brands that prioritize sustainability and environmentally
Milton Friedman’s Permanent Income Theory friendly practices.

• According to Milton Friedman, The Current 6. Personalization: Some consumers appreciate

Income is the sum of Permanent Income + personalized products or services that cater to their
Transitory Income and Consumption is only individual needs and preferences.
affected by changes in Permanent Income
Factors Influencing Preferences:
The Bottom Line: Consumption depends mainly upon
Personal Taste: Preferences are influenced by factors such
lifetime wealth and permanent changes to our income. Short
as culture, education, and personal experiences.
run and transitory affects have only a small effect on our
current consumption, because we save/borrow most of these Social Influence: Friends, family, and societal norms can
changes. shape what individuals prefer.
Product Attributes: Aspects like color, fabric, size, and
additional features impact consumer preference.
2.) Consumer preferences Opportunity Cost: When choosing one item, consumers
• Is the study of varying consumer choices that govern forgo the opportunity to buy another competing item.
buying decisions in a market. They are the factors
that influence the choices that consumers make
when buying products and services. Consumers are 3.) What is optimization of income?
driven by a desire to maximize their satisfaction
with every purchase. • Optimization of income refers to the process of
maximizing revenue and profitability while
Types; Qualitative: It focuses on the features and minimizing costs and inefficiencies in order to
characteristics of a product or service, such as design, brand achieve the highest possible income for a business
reputation, durability, and usability, defining the core or individual. It involves strategically managing
qualities of the product. various aspects of income generation, such as sales,
Quantitative: Such preferences are based on the tangible pricing, expenses, and productivity, to ensure the
and quantifiable attributes of a product. For example, the best financial outcomes.
size, shape, and quantity of a product are considered • In an optimization approach, businesses or
important. individuals analyze their current income sources,
Conditional: It refers to preferences that change based on identify areas where improvements can be made,
certain conditions. If the conditions a consumer has defined and implement strategies to enhance revenue and
are not met, they would mostly opt for an alternative. For reduce costs. This may involve increasing sales
example, a consumer buying cleaning supplies may set a through effective marketing and sales techniques,
condition that they would buy a particular company’s improving pricing strategies, reducing unnecessary
products only if it offered a discount or sold a bundle (a set expenses, streamlining operations, and investing in
of related items sold together). Unconditional: This refers productivity-enhancing measures.
to preferences that do not depend on any parameter or There are four top-level strategies to work on when
condition. It means a consumer will be willing to spend optimizing your revenue: acquisition, retention, expansion
money on such products, irrespective of their price, size, and pricing.
shape, color, timely availability, features, functions, etc.

Examples;
 1. Acquisition For example, if you sell makeup, you could create resources
on different techniques for applying your products, what the
To get the best results from your customer acquisition
best practices are for storing them and what ingredients they
strategy, you want to attract the best-fit prospects who will
contain. An office furniture company, on the other hand,
provide the most revenue for your company while also
could provide written and video walkthroughs of how to
keeping your customer acquisition cost as low as possible.
assemble their products, tips for interior design and
The foundation of doing this successfully is collaborating
warranty information.
with teams across your company to define your buyer
personas. Buyer personas are semi-fictional representations Another major aspect of customer retention is your
of your best-fit customers. Buyer personas and ideal customer feedback program. Customer feedback can help
customer profiles help you ensure you’re investing your you determine which products are the most valuable, what
marketing and sales resources into attracting and nurturing your customers need from your company and where you
prospects who have the best likelihood of becoming have room for improvement. Customer feedback can also
successful customers. As you’re creating them, you need to help you identify who your best-fit customers are and where
take into consideration who is the most interested in your opportunities for more revenue lie. So, it’s important to
offering, who is the easiest to sell to and who sees the most collect feedback both informally and formally, through
value from your solution while having the least support surveys, interviews, reviews and social listening.
needs. Once you ensure you’re going after the right leads,
3. Expansion
the next step of optimizing your acquisition strategy is to
determine which customer acquisition channels generate the Expansion revenue is gained through up selling and
most revenue and have the highest ROI. It’s important to crossselling to existing customers. Many tactics to improve
analyze channels with both revenue and ROI in mind to get your expansion strategy overlap with the tactics for
the full picture of whether or not a channel is costeffective. improving customer retention: you need to take customer
For example, if you get the most revenue from paid feedback into account and ensure they’re seeing success
advertising but invest the most in it and your organic social with the product they’re currently using. Then you can
media efforts bring in the second- largest amount of revenue expand on what they purchase from you by promoting
and require a much smaller investment, social media might similar products or complementary products. If a customer
be a more valuable channel for you to leverage. bought a laptop from you, see if they also want computer
accessories like power cables, carrying cases, external hard
2. Retention drives and extra monitors. Once their computer gets old,
-It’s much cheaper to retain existing customers than it is to reach out and see if they’re interested in upgrading to a
acquire new ones. newer model.
If a customer has had a positive experience with your
A successful retention strategy revolves around good
company and your product, they’re likely to be open to
customer service. Consider the following questions:
continue doing business with you so a simple
-Does your product meet your customers’ expectations? communication can result in more sales.

-Does the value your product provides align with what 4. Pricing
customers paid for it?
Your pricing strategy is the way you set and communicate
-If something goes wrong with your product, do your the prices of your products or services, and how they relate
customers know how to contact your company? to your value proposition and your customers’ willingness
-Do your customers feel like the feedback is being heard and to pay. Optimizing your pricing strategy means finding the
addressed? optimal price point that maximizes your revenue and profit,
while also satisfying your customers and maintaining your
The answers to those questions will determine how loyal a
competitive advantage. You can use various methods to
customer will be and how likely they are to make repeat
optimize your pricing strategy, such as cost-based pricing,
purchases as well as recommend your company to others.
value- based pricing, competitive pricing, or dynamic
Some of the work needed to optimize your retention
pricing.
strategy occurs before a customer is even closed.
Expectation setting, for example, happens during the When you’re thinking about pricing long-term, you need to
marketing and sales process. You need to ensure how a consider how you can maximize the profit from both
product is positioned to a prospect early on aligns with what individual sales and individual customers at the same time.
they actually receive post-sale. Since retention and expansion are more sustainable and
profitable than acquisition, the goal behind your pricing
To help customers get value from your product, you can
strategy should be to support generating repeat purchases —
equip them with resources and training. Create knowledge
and that might involve making less revenue from your first
base articles, video tutorials or training that teach customers
engagement with a customer in order to get them through
about every aspect of your product, from how to set it up to
the door.
how to use it to how to maintain it to why it’s valuable. What
these resources should look like will depend on your Conclusion
product and your customers.
By successfully optimizing your revenue, you make your
company healthier and position it to grow more sustainably.
But, it’s important to keep in mind that revenue optimization changes in consumption, but
is a data-driven process. Identifying your bestfit, most- the exact nature of these
profitable customers requires segmentation and data changes can depend on
analysis. Then as you work to perfect your acquisition, personal preferences and the
retention, expansion and pricing strategies, you’ll need to types of goods and services
experiment and track and measure the results. involved.

4.) Income - is a unit of value that is used to measure the 5.) REAL INTEREST RATE
production of goods and services in an economy. It can be • An interest rate that has
created as a result of work, trade, or natural resources.
been adjusted
Consumption - is defined as the use of goods and services for inflation.
by a household
HOW CHANGES IN REAL
HOW DO CHANGES IN INCOME AFFECTS
INTEREST RATE AFFECT
CONSUMPTION
CONSUMPTION
Changes in income can significantly impact consumption
choices. When income increases, consumers tend to ECONOMISTS DECOMPOSE
purchase more goods and services. This is because they THE IMPACT OF AN INCREASE
have more disposable income to spend, leading to an IN THE REAL INTEREST RATE
increase in consumption. Conversely, when income ON CONSUMPTION INTO TWO
decreases, consumers typically reduce their consumption EFFECTS:
because they have less disposable income.
INCOME EFFECT
TWO BROAD CATEGORIES OF GOODS
A microeconomics
1. Normal Goods term describing how
changes to consumers' real
2. Inferior Goods income levels can affect their
purchasing patterns.
1. Normal Goods- are those
whose demand increases as people's SUBSTITUTION EFFECT
incomes and purchasing power rise. A normal
Consumers switching to
good is defined as having an income elasticity
cheaper products as price
of demand coefficient that is positive, but less
increases.
than one.
LOW REAL INTEREST RATE
2. Inferior Good- Is a good whose
demand decreases when consumer income SUBSTITUTION EFFECT A low
rises (or demand increases when consumer real interest rate reduces the
income decreases). An "inferior good" is a opportunity cost of
good where, when the individuals income consuming today instead of
rises they buy less of that good. saving for the future.
It's important to note that the
INCOME EFFECT A low real
exact changes in consumption
interest rate may reduce
can vary according to personal
income earned from savings
taste. Some people might
and investments, potentially
choose to spend their
limiting disposable income.
increased income on entirely
different goods or services, HIGH REAL INTEREST RATE
while others might save it. SUBSTITUTION EFFECT
In economics, goods and
A high real interest rate
services that see an increase in
increases the opportunity cost
quantity consumed with a rise
of consuming today instead of
in income, and a decrease in
saving and earning a higher
quantity consumed with a fall in
income, are called normal return in the future.
goods.
INCOME EFFECT
Remember, the key point is
A high real interest rate can also increase
that income changes lead to
income earned from savings and
investments, providing individuals with more
disposable income.