1.) John Maynard Keynes and The Consumption
Keynes's enduring legacy lies in the
Function
John Maynard Keynes (1883–1946) was an early
20thcentury British economist, best known as the founder
of Keynesian economics and the father of modern
macroeconomics, the study of how economies—markets
and other systems that operate on a large scale— behave.
Born into a middle-class family, he received scholarships
to two of the most elite schools in England, Eton College
and Cambridge University, where he earned an
undergraduate degree in mathematics in 1904.
Throughout his academic career, he excelled at
mathematics—and he had almost no formal training in
economics.
Keynes' father was an advocate of laissez-faire
economics, an economic philosophy of freemarket
capitalism that opposes government intervention.
However, after the 1929 stock market crash triggered the
Great Depression, Keynes came to believe that
unrestricted free market capitalism was essentially
flawed and needed to be reformulated, not only to
function better in its own right but also to outperform
competitive systems like communism.
As a result, he began advocating for government
intervention to curb unemployment and correct economic
recession. In addition to government jobs programs, he
argued that increased government spending was
necessary to decrease unemployment— even if it meant
a budget deficit.
What is Keynesian Economics?
The theories of John Maynard Keynes, known as
Keynesian economics, center around the idea that
governments should play an active role in their countries'
economies, instead of just letting the free market reign.
Specifically, Keynes advocated federal spending to
mitigate downturns in business cycles.
Basic Principles of Keynesian Economics Demand—not
supply—is the driving force of an economy.
Consumption (spending) is the key to economic recovery.
These two principles are the basis of Keynes' belief that
demand is so important that, even if a government has to
go into debt to spend, it should do so. According to
Keynes, the government boosting the economy in this
way will stimulate consumer demand, which in turn spurs
production and ensures full employment.
The Bottom Line; John Maynard Keynes, a pivotal
figure in 20th-century economics, introduced
revolutionary ideas that greatly impacted post-World War
II economies. Despite facing criticism in the 1970s,
Keynesian economics experienced a resurgence in the
2000s and continues to be a topic of debate today. Central
to Keynesian theory is the belief that government
intervention, particularly through increased spending to
stimulate demand, is crucial for pulling an economy out
of recession.
recognition of government's role in economic well-being,
sparking ongoing discussions about the extent and
methods of governmental intervention in shaping
economic outcomes.
Consumption Function
In economics, the consumption function describes a
relationship between consumption and disposable income.
The consumption function was introduced by British
economist John Maynard Keynes, who argued the function
could be used to track and predict total aggregate
consumption expenditures. It is a valuable tool that can be
used by economists and other leaders to understand the
economic cycle and help them make key decisions about
investments as well as monetary and fiscal policy.
Also called the Keynesian consumption function, it tracks
the proportion of income used to purchase goods and
services. Put simply, it can be used to estimate and predict
spending in the future. The classic consumption function
suggests consumer spending is wholly determined by
income and the changes in income. The idea is to create a
mathematical relationship between disposable income and
consumer spending, but only on aggregate levels.
The Bottom Line; John Maynard Keynes is often credited
as being the father of modern macroeconomics. His branch
of economics, called Keynesian economics, suggested that
demand was the driving force of any economy. He also
introduced the idea of the consumption function, which
explains the relationship between a
country's income and spending. According to the theory,
spending is sensitive to the level of income. So spending
will increase when income does. Economists and leaders
can use this theory to help make predictions about future
spending and important economic and investment decisions
for the future.
CONSUMPTION PUZZLE
The Consumption Puzzle refers to a phenomenon in
macroeconomics where changes in income do not lead to
equivalent changes in consumption. Specifically, the puzzle
arises from the observation that changes in income explain
only a small fraction of the variation in consumption over
time.
KUZNET CONSUMPTION PUZZLE
Kuznet is actually a name came from Simon Kuznet. Simon
Kuznet was a Noted American economist who conducted
empirical studies regarding consumption of the US
economy for the period 1869-1938. His study was based on
a cross-section of household budget data over long term
time-series data.
JOHN MAYNARD KEYNES
Keynes represented the consumption function as ‘C = a +
bY’ , stating that even at zero income level there will be
certain consumption financed by dissavings or borrowings.
Thus the average propensity to consume would also reduce
as income rose. He created the Keynesian Consumption
Function to model how people spend their money, and what
happens to Consumption when Income increases.
TWO THEORIES
• Franco Modigliani’s Life-Cycle Theory of
Consumption
• Milton Friedman’s Permanent Income Theory
Franco Modigliani’s Life-Cycle Theory of
Consumption
• According to Franco Modigliani, the income
varies systematically over the phases of a
consumers “life cycle” so consumers make
plans to smooth lifetime consumption. As a
consumer grows older they save more of their
income for retirement.
Milton Friedman’s Permanent Income Theory
• According to Milton Friedman, The Current
Income is the sum of Permanent Income +
Transitory Income and Consumption is only
affected by changes in Permanent Income
The Bottom Line: Consumption depends mainly upon
lifetime wealth and permanent changes to our income. Short
run and transitory affects have only a small effect on our
current consumption, because we save/borrow most of these
changes.
2.) Consumer preferences
• Is the study of varying consumer choices that govern
buying decisions in a market. They are the factors
that influence the choices that consumers make
when buying products and services. Consumers are
driven by a desire to maximize their satisfaction
with every purchase.
Types; Qualitative: It focuses on the features and
characteristics of a product or service, such as design, brand
reputation, durability, and usability, defining the core
qualities of the product.
Quantitative: Such preferences are based on the tangible
and quantifiable attributes of a product. For example, the
size, shape, and quantity of a product are considered
important.
Conditional: It refers to preferences that change based on
certain conditions. If the conditions a consumer has defined
are not met, they would mostly opt for an alternative. For
example, a consumer buying cleaning supplies may set a
condition that they would buy a particular company’s
products only if it offered a discount or sold a bundle (a set
of related items sold together). Unconditional: This refers
to preferences that do not depend on any parameter or
condition. It means a consumer will be willing to spend
money on such products, irrespective of their price, size,
shape, color, timely availability, features, functions, etc.
Examples;
1. Brand loyalty: Some consumers prefer to purchase
products from a specific brand that they trust and have had
positive experiences with in the past.
2. Price sensitivity: Some consumers prioritize
finding the best deal or the lowest price when making
purchasing decisions.
3. Quality: Other consumers may prioritize the quality
of a product over price, opting for higher-end or premium
products.
4. Convenience: Some consumers value convenience
and may prefer products or services that are easily
accessible or save them time.
5. Environmental sustainability: Increasingly,
consumers are showing a preference for products and
brands that prioritize sustainability and environmentally
friendly practices.
6. Personalization: Some consumers appreciate
personalized products or services that cater to their
individual needs and preferences.
Factors Influencing Preferences:
Personal Taste: Preferences are influenced by factors such
as culture, education, and personal experiences.
Social Influence: Friends, family, and societal norms can
shape what individuals prefer.
Product Attributes: Aspects like color, fabric, size, and
additional features impact consumer preference.
Opportunity Cost: When choosing one item, consumers
forgo the opportunity to buy another competing item.
3.) What is optimization of income?
• Optimization of income refers to the process of
maximizing revenue and profitability while
minimizing costs and inefficiencies in order to
achieve the highest possible income for a business
or individual. It involves strategically managing
various aspects of income generation, such as sales,
pricing, expenses, and productivity, to ensure the
best financial outcomes.
• In an optimization approach, businesses or
individuals analyze their current income sources,
identify areas where improvements can be made,
and implement strategies to enhance revenue and
reduce costs. This may involve increasing sales
through effective marketing and sales techniques,
improving pricing strategies, reducing unnecessary
expenses, streamlining operations, and investing in
productivity-enhancing measures.
There are four top-level strategies to work on when
optimizing your revenue: acquisition, retention, expansion
and pricing.
 1. Acquisition
To get the best results from your customer acquisition
strategy, you want to attract the best-fit prospects who will
provide the most revenue for your company while also
keeping your customer acquisition cost as low as possible.
The foundation of doing this successfully is collaborating
with teams across your company to define your buyer
personas. Buyer personas are semi-fictional representations
of your best-fit customers. Buyer personas and ideal
customer profiles help you ensure you’re investing your
marketing and sales resources into attracting and nurturing
prospects who have the best likelihood of becoming
successful customers. As you’re creating them, you need to
take into consideration who is the most interested in your
offering, who is the easiest to sell to and who sees the most
value from your solution while having the least support
needs. Once you ensure you’re going after the right leads,
the next step of optimizing your acquisition strategy is to
determine which customer acquisition channels generate the
most revenue and have the highest ROI. It’s important to
analyze channels with both revenue and ROI in mind to get
the full picture of whether or not a channel is costeffective.
For example, if you get the most revenue from paid
advertising but invest the most in it and your organic social
media efforts bring in the second- largest amount of revenue
and require a much smaller investment, social media might
be a more valuable channel for you to leverage.
2. Retention
-It’s much cheaper to retain existing customers than it is to
acquire new ones.
A successful retention strategy revolves around good
customer service. Consider the following questions:
-Does your product meet your customers’ expectations?
-Does the value your product provides align with what
customers paid for it?
-If something goes wrong with your product, do your
customers know how to contact your company?
-Do your customers feel like the feedback is being heard and
addressed?
The answers to those questions will determine how loyal a
customer will be and how likely they are to make repeat
purchases as well as recommend your company to others.
Some of the work needed to optimize your retention
strategy occurs before a customer is even closed.
Expectation setting, for example, happens during the
marketing and sales process. You need to ensure how a
product is positioned to a prospect early on aligns with what
they actually receive post-sale.
To help customers get value from your product, you can
equip them with resources and training. Create knowledge
base articles, video tutorials or training that teach customers
about every aspect of your product, from how to set it up to
how to use it to how to maintain it to why it’s valuable. What
these resources should look like will depend on your
product and your customers.
For example, if you sell makeup, you could create resources
on different techniques for applying your products, what the
best practices are for storing them and what ingredients they
contain. An office furniture company, on the other hand,
could provide written and video walkthroughs of how to
assemble their products, tips for interior design and
warranty information.
Another major aspect of customer retention is your
customer feedback program. Customer feedback can help
you determine which products are the most valuable, what
your customers need from your company and where you
have room for improvement. Customer feedback can also
help you identify who your best-fit customers are and where
opportunities for more revenue lie. So, it’s important to
collect feedback both informally and formally, through
surveys, interviews, reviews and social listening.
3. Expansion
Expansion revenue is gained through up selling and
crossselling to existing customers. Many tactics to improve
your expansion strategy overlap with the tactics for
improving customer retention: you need to take customer
feedback into account and ensure they’re seeing success
with the product they’re currently using. Then you can
expand on what they purchase from you by promoting
similar products or complementary products. If a customer
bought a laptop from you, see if they also want computer
accessories like power cables, carrying cases, external hard
drives and extra monitors. Once their computer gets old,
reach out and see if they’re interested in upgrading to a
newer model.
If a customer has had a positive experience with your
company and your product, they’re likely to be open to
continue doing business with you so a simple
communication can result in more sales.
4. Pricing
Your pricing strategy is the way you set and communicate
the prices of your products or services, and how they relate
to your value proposition and your customers’ willingness
to pay. Optimizing your pricing strategy means finding the
optimal price point that maximizes your revenue and profit,
while also satisfying your customers and maintaining your
competitive advantage. You can use various methods to
optimize your pricing strategy, such as cost-based pricing,
value- based pricing, competitive pricing, or dynamic
pricing.
When you’re thinking about pricing long-term, you need to
consider how you can maximize the profit from both
individual sales and individual customers at the same time.
Since retention and expansion are more sustainable and
profitable than acquisition, the goal behind your pricing
strategy should be to support generating repeat purchases —
and that might involve making less revenue from your first
engagement with a customer in order to get them through
the door.
Conclusion
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.