Question

“Under a study, examining the spending habits of a hypothetical economy, it was observed that even households with zero income managed to consume basic necessities.

As the income of people increased, their consumption also increased, but not as rapidly as income.”

Based on the given text and common understanding, answer the following questions :

Identify and elaborate the type of consumption indicated in the first para of the above text.

Hint:

Consumption at zero income is autonomous consumption. It does not depend on income and meets the minimum needs for survival.

Answer 1

Step 1: Find the clue in the text:
The first para says that even households with zero income managed to consume basic necessities.
So some consumption takes place even when income is zero. This kind of consumption does not depend on income.

Step 2: Identify the type of consumption:
The type of consumption indicated is Autonomous Consumption.

Step 3: Elaborate on autonomous consumption:
Autonomous consumption is the part of consumption that is independent of the level of income.
It is the minimum level of consumption needed for survival, such as food, clothing and shelter.
It must be met even if income is zero. People meet it by borrowing or by using past savings.
In the consumption function C = a + bY, it is the constant term a. It is the intercept of the consumption curve on the vertical axis.

Step 4: Link back to the text:
The second para talks about the part of consumption that rises with income, but less than income. That is induced consumption, so it is not the one asked here.

Final Answer:
The first para indicates Autonomous Consumption, the minimum consumption for survival that does not depend on income.