CHAPTER ONE

1. INTRODACTION
1.1 Back ground of study .

All around the world, understanding of concept of consumption is very important for overall
economy. Consumption is act of using goods and services to satisfy human needs and desires.
Most business activist in the world is aimed at providing goods and services for consumption.
The value of goods services that a family consumes defends almost entirely on its income and
wealth. Americans spend more than 95% of their after -tax income on consumer goods and
services. About 2/3 of all the goods and services that produced in USA in each year are used by
consumers. The remaining1/3 is used by the government or invested in buildings, manufacturing
machinery, other forms of capital in America, or other countries of world (Henry, 2001)

Consumption consists of the goods and services bought by household in different product
catagoris.it makes up 2/3 of GDP because consumption is so large. Macroeconomics have much
energy to studding households decide how much to consume. (Mnkew, 2000)

In modern term household consumption previously defined 70 to 80 percent of total national

expenditure. Even in western capitalist countries, a significance part total consumption is
determined by expenditure of public authority. (McHenery, 1768)

Obviously, 85% of total population of Ethiopia lives in rural area and practicing in agriculture
sector with subsistence farming system. Compared this production system with its population
growth rate.it Is difficult for each household head to feed his or her family. Generally in Ethiopia
including Tigray region the household consumption behavior is in the lowest level this is
because, since most people in Ethiopia produced agricultural products and these products are
both price and income inelastic the return from such type of production is very low. (Soni, 1995)

In all aspects of household faces problems to satisfy their needs. Because individuals are live in
the incomplete world. Therefore, the household consumption behaviors in the world, continent,
and country even at region level are different. Due to variation of income and other available

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among nations and people in the world when individuals household income increase,
consumption and saving also increases and vice versa. It implies that consumption is determined
by household income. (sitotaw and nigus,2005)

1.2 Statement of the Problem

Theoretically, there are many different factors which determine the growth of the overall
economy of the country. Among these, the most determinant is consumption of household. Even
though, Zelalem Tesfaye tries to analyze a study on household consumption behavior in Addis
Ababa city in 2005, he analyzed his study by considering household income and family size as
main determinants of household consumption behavior. But this study would need more
explanatory variables that determine the consumption behavior of the household. Then the study
wants to search other variables that determine the household consumption behavior. This
initiated the study to conduct a research on household consumption behavior. Since household
consumption is the major determinant the overall economy. It has attention of both micro and
macro economists interested in household behavior on the behavior of aggregate consumption in
explaining aggregate function. Naturally, each household save and invest their income after
consumption completed. It implies that the level of consumption tees us level of saving.
Consumption and investment has and negative relationship.

According to Harood and Domar saving or investment are almost proportional and affected by
consumption level. That is if household consumption has such type effect on the economy, the
economy has changed. This lead to conduct a research on household consumption behavior.
Specially, least developed countries like our country Ethiopia, household are more interested on
consumption than investment. Thus the consumption level of household can determine the
investment level of country. Then government of country are interested to design polices and
strategies to overcome such problems. It initiated to conduct a research on household
consumption behavior.

The level and distribution of poverty in Ethiopia is extensive. According to 2010/2011

household income, consumption and expenditure survey by central statistical agency authority
(CSA) report from total population 54%of rural and 37 % of urban area are found to below

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poverty line. To overcome such problems government has prepared its poverty reduction
programs entitled “Sustainable Development and Poverty Reduction Program” (SDPRP).
And also unveil “Five Years Growth and Transformation Plan “(FYGTP) on October 2010.

To achieve these programs according to their planed time frame work, initially knowing
household consumption, income, expenditure behavior is very important. This initiates the study
to conduct on household consumption behavior.

1.3 Objective of the Study

1.3.1 General objective

The main objective of the study is to show household consumption behavior using micro analysis
in Tigray region Mekelle city.

1.3.2 Specific objective

 To assess the consumption pattern of household in Mekelle city.
 To show the effect of household disposable income, family size, education level of
household head, age of household head and saving status of household on household
consumption behavior.
 To provide basic data that enables to design, monitor and evaluate the impact of socio
economic policies and program on household living standard.

1.4 Significance of study

The main significance of the study is to provide information and frame work to residents of
Mekelle town about income, consumption, expenditure pattern. The findings of the study
initiates other interested bodies to undertake a better and detailed study in this area, and it may
also draw attention of researchers to the importance of understanding and knowing the household
consumption on behavior to help in designing policies and strategies for future development of
the country and welfare of the society as a whole.

1.5. Scope of Study

A household consumption behavior analysis involves a range of activities, which needs ample
time to cover all details; it requires understanding the resource base of a particular area in
relation to particular group of people. Moreover, the household consumption behavior are

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numerous, and vary from household to other. Likewise, factors that affect household’s
consumption behavior also varies. However it is difficult to exhaust all consumption behaviors
and factors influencing household consumption behavior the study confine itself to the major and
common ones, which are found to be relevant to the topics and research area. In line with this,
for reasons associated with time and resource, the scope of the study is limit on two selected
kebeles in Tigray region Mekelle city.

1.6 Data source and Methodology

1.6.2 Data source and collection Strategies

1.6.1.2 Data type and source of data

According to (Seaton Et, 20000) data collection for research can distinguish according to
secondary an primary types. Secondary data are which already exist for an established purpose.
On other hand, primary data are data not available in secondary form and must be allocated to
address the specific need of the research. This research mainly used the information based
primary data in Mekelle city with 132 sample size. To collect such type of data the study used
questionnaire method.

Mekelle city compromises 7 sub city having a total of 54090 households (Mekelle city
administration, 2010). From these 2 sub cities are selected randomly. These are Kedamayweyane
with 8079, Adihaki with 5911 households.

1.6.1.3 Sampling Technique

There are two main sampling techniques in modern research study. These are probability
sampling and non- probability sampling. The study used simple random sampling techniques i.e.
purposive with homogenous population in various aspects, like, culture, living standard etc.

1.6.2 Methodology

1.6.2.1 Method of data analysis

Due to the nature of data the study, the methodologies used in this study are both descriptive and
econometric model.

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 1.6.2.1.1 Model specification
lnCT =β0 + β1 ydi +β2 Ni+β3 Educi+β4 Agei+β5 si + β6 odf + Ui

CT = total household consumption per month

Yd =household disposable income per month

Ni =household family size

Educ =education level of household head in years

Age = age of household head in year

Si = household saving status: yes=1 no=0

Odf= other family that dependent on the household

Ui =error term

Bi=coefficient of explanatory variables

B0 =autonomous consumption or constant

Ln= elasticity (logarithm)

1.6.2.1.2 Description and Expected Sign of the Variables

Dependent variable:

It is a continuous variable with the following expenditure items (components).

E1- Expenditure on food and drink (cereal, vegetable, fruit, milk, and milk product, alcohol, chat
and cigarette)

E2- Expenditure on clothing including foot ware (shoe)

E3- Expenditure on housing (building materials, housing maintain ace and rent)

E4- Expenditure on culture and social (expenditures on different ceremonies, contribution on

idir, donation to religious institution)

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E5- Expenditure on miscellaneous (water bills, electricity bills, telephone bill including mobile
card payment.)

E6- Expenditure on school fee (school fees and other education expenditure).

E7- Expenditure on medical service (expenditure on health treatment)

E8- Expenditure on other (expenditure on Kitchen equipment, durable goods, fuel, utilities,
personal care, transportation and non-durable goods).

Independent variables:

Household disposable income (yd)- It is the income after tax (net income of household from
different source of income).the study will expect it affect s the household consumption
positively.

Family size (ni): - It is the total numbers of household members. So, the study will expect that it
affects household consumption positively. As supported Zelalem Tesfaye.

Age of household head (age): - It is one of the determinant of household consumption and will
expect, it affects consumption negatively.

Education level of household head (Educ):- The study will expect that it affect household
consumption positively as supported by Taddesse Kumma, 2010.

Saving status of household (si):- It is a continuous variable and will expect that it affect
household consumption negatively.

Other dependent family household (odf)- It is a continuous variable and represent the other
household depend on the household and the study expect that it affects household consumption
positively.

After gathering information based on the above coding system, it can pictured out in available
graph (pie chart).

For econometrical analysis, the study concentrated on the variables, such as, household
disposable income (Yd), household family size (Ni), age of household head (Age), household

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head education level (Educ) and total household saving status (Si) as explanatory variable and
total household consumption (Ct) as dependent variable using ordinary least square (OLS)
estimation method. Additionally, t-test (variable significant), prob> F, multicoliniarty and
hetrosecdacticity problems were tested.

This estimation worked out with help of STATTA software application program method.

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 CHAPTER TWO
2. Review of Literature
2.1 Review of Theoretical Literature
2.1.1 An Evolutionary Theory of Household Consumption Behavior
The Study Propose the following general theoretical formulation, while not yet fully fleshed out,
has the promise of bringing many aspects of consumer behavior with encompass of a behavioral
and evolutionary economic theory.

Regarding the objectives and satisfaction sought by household in their purchase of good and
services, as we have noted a number of empirical studies indicate strongly that the idea that
household have a well defend coherent general utility function cannot hold water. In its place we
assume that a household has asset of particular wants it attends and that the goods and services it
purchases are intended for use in meeting those wants. The study also assume that households
can judge at least roughly whether particular wants are being met, or if wants satisfaction is a
matter of degree, to assess with some consistency whether a particular want is being met better
or less well in one situation as compared with another. In contrast, the study propose that, while
not strictly random, once basic levels of wants satisfaction are met, households can have
difficulty in judging whether they are better or worse off when one wants is met better and
another less well than in an earlier situation, and their evaluation of this can be in consistent.
(nelson and David, 2010)

This formulation obviously departs from the view in standard neoclassical economics that sees
households as having stable well-defined utility functions and acting as “utility maximizers”. On
the other hand, the formulation is consistent with the view of households as trying to meet their
perceived needs and wants as well as they can give what they know or believe. Although,
households are seen more confident and consistent about how to meet particular wants better or
worse than they are about the tradeoff involved in meeting different wants to different degrees.
Obviously, some wants are partly basic and biological. But even in primitive societies, the range
of that are attended goes far beyond anything that is closely linked to biological needs. And the
customary ways meeting different want, even basic wants, differ greatly across societies. It is
clear that both the wants that households attend, and the standard means of meeting, are strongly

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shaped by the culture surrounding a household, and with which its members grow up. But, it also
clear that there are significant differences across households with in a given experiences,
circumstances, and other idiosyncratic elements.

Household consumption behavior obviously operates under a set of constraints. Putting cultural
bounding and the limits and requirements set by individual household idiosyncrasies aside for a
moment, household purchases of the goods and services used in their activities to meet wants are
limited by two other kinds of constraints. One is the budget constraints of standard consumer
theory. Many years ago wisely Mitchell, in the famous article “the back ward art of spending
money” (1992) despair that many households had little idea as to how to use their budget
effectively.

The second constraint stems from the fact the household consumption activities take time. More
or less time can be spent sleeping or earning income. People can be hired to perform a variety of
services. Thus, the time constraint for many households contemplating things they would like to
do and can afford financially is lack of time to do them.

The study make three non-trivial assumptions regarding the activities a household uses at any
time to meet wants. The first is that particular activities are specialized to particular wants. This
assumptions does not imply that particular consumer goods and services can be used to meet
only one want some might be used in several activities but rather that the activities specialized.
The second is that at any time a household employs a small number of activities to meet any
particular want they attend. The employment of more than one activity to meet abroad want
permits some variety. The same dinner every evening can be boring. On any Saturday a
household may contemplate going to a movies apply or a concert. However, for the reasons we
argued earlier, a household tends to commit to a limited pattern of variation in the activities
customary used to meet a want as largely a matter or routine.

Third, once a collection of activities to meet a particular want is established by a household, and
a routine of variation with in that se, the study assume that changes in balance of variation with
in that collection is much easier for it to effect, or even contemplate, than adding new and
unfamiliar activities. The latter requires that the household contemplate doing things as a new
way, and this studies assume requires more conscious pondering than simply doing a little more

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of this and a bit, less that. Activities are defined in terms of their basic action patterns, the
inputs they employ.

In some but not all of the following discussion, the study assume that activities can be employed
at various levels. Under this specification, the greater the level of use of an activity the greater
the degree of fulfillment of the want it services, and the more the inputs it employs.

As evolutionary economic theories the study, recognize that household consumption behavior is
never completely static. The circumstance influencing consumption behavior always includes
some new elements. Children get older and adults too. Accidents and illness occur. Old friends
move and new ones are made. Ideas are generated for new things to do. These kinds of changes
always are going on, even of income and prices are constant. However, we think the concept
household consumption equilibrium is a use full one as a bench mark for analysis of household
response to change condition and perception, and we define such concept below.

Household consumption equilibrium involves, first, a set of wants it is attending and a want
satisfaction target for each. Second, a collection of activities and activity levels it is using to meet
each want, and a customary balance among the several. Third, purchases of inputs associated
with those activities and third differential employment. In equilibrium, the mix of activities and
their levels, and how the household organizes its activities, just meets want satisfaction targets,
and the purchases of inputs fit within the household’s budget and time constraints with little
slack. And of particular importance the household has no tendency to changed circumstance, or
changes are the thing it knows or believes (Nelson and David, 2010).

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 2.1.2 Theories of Consumer Behavior
Consumer behavior means how consumers decide on the basket of goods and services they
consume. It is essentially decision making behavior. In most cases, behavior of consumer
measured by its utility.

Utility refers to the numerical score responding the satisfaction that a consumer gets from a
market basket. In other words, utility is device used to simplify the ranking of market basket.
Alternatively, utility of a commodity is the basis of demand for it.

2.1.2.1 Approaches to the Analysis of Consumer Behavior

In the study there are four main approaches to the analysis of consumer behavior.

2.1.2.1 A. Cardinal Utility Approach

It states that utility is measurable in cardinal absolute terms.

Assumptions

Rationality: - it is assumed that the consumer is rational being in the sense that he or she satisfies
his/her wants in order of their merits.

Limited money income: - the consumer has a limited money income to spend on the goods and
services he/ she choose to consume.

Maximization of satisfaction: - every rational consumer intends to maximize his /her satisfaction
from his/her given money income.

Utility is cardinally measurable:- the cardinalists assume that utility is cardinally measurable
that is it can be measured in absolute terms. For them, utility of one unit of a commodity equal of
the amount paid for it.

Diminishing marginal utility:- the cardinality assumed that the gained from successive unit of a
commodity consumed decrease as the consumer consumes a larger quantity of it.

Constant utility of money:- the marginal utility of money remains constant whatever the level
of consumer income.

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Utility is additively separable:- utility derived from various goods and services consumed by
consumer can be added together to obtain the total utility. It can be expressed through utility
function. Suppose that the basket of goods and services consumed by consumer contains “N”
items and their quantity may be expressed as:-

U=F(X 1, X2, X 3 ……..XN)

kGiven the utility function above, the total utility obtained from (n) items maybe expressed as:-

UN = U1(X1) + U2(X2) + U3 (X3) + ………………………UN (XN)

2.1.2.1B. Ordinal (In Difference Curve) Utility Approach

It is only an expression of the consumer’s preference for one commodity over another or for one
basket of goods over another.

Assumption

Rationality: - the consumer is a rational being. He or she aims at maximizing his or her total
satisfaction given his or her income and price of goods and services he or she consumes. They
have full knowledge of their own circumstance and conditions required for rational decision.

Ordinal utility: - unlike cardinal utility approach, in difference curve analysis assume that utility
only ordinary measurable. That is, the consumers are able to express only the order of their
preference.

Transitivity and consistency of choice: - consumers’ choice are assumed to transitive.

Transitivity of choice means that of, a consumer prefer, commodity X to Y and Y to Z, then,
they must prefer X to Z or they treat X=Y and Y=Z, they treat X=Z. (A.Koutsoyiannis, 1997)

Consistency choice means that, if they prefer X to Y in one period, they will not prefer Y to X in
another period or treat them as equal, everything remaining the same.

An indifference curve is the locus of points, each representing a different combination of goods,
which yield the same utility or level of satisfaction to the consumer. So that they are indifferent

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between any combinations of goods when i9t comes to making a choice between them. It also
known as Iso utility or equal utility curve (Hiwot, 2007)

2.1.2.1C.The Permanent Income Hypothesis

This hypothesis is primarily developed by Milton Friedman (1976) winner of prize in university
of Chicago, Friedmans’s point of view is the rejection of the usual concept of current income and
it’s replacement with permanent income. A household permanent income in any one year is in no
sense indicated by its current income to be received over a long period of time, stretching out
over a number of future years. Friedman puts this permanent income is to be interpreted as the
mean income regard as permanent by the consumer unit in question which in turn depends on its
horizon (Dornbush, 1975)

Households measured or observed income in any particular year may be larger or smaller than its
permanent income. Friedman divides the households measured yearly income into permanent
and transitory income, so that is measured income is large or smaller than its permanent income
depending on the sum of positive and negative transitory income components. In the same way,
Friedman divides measured consumption in to permanent and transitory components. A good
purchased because of an attractive sale price or a normal purchase deferred due to unavailability
of the good are examples of positive and negative transitory consumption (Mankiew,2000).

2.1.2.1D.The Life Cycle Hypothesis

This hypothesis developed by Franco Modgliani (1985) a novel prize winner in economic
science. It is like Friedman’s permanent income hypothesis in that the individual consumption in
any given time period does not depend on to a significant degree on his income during that
period but depends on value of expected income wealth.

The life cycle hypothesis is based on the argument that the rate of consumption in any given
period is a facet of plan, which extends, over his life cycle, although his income displays a quit
different pattern over the same year.

According to him, age structure of the population is an important determinate of consumption

pattern of different households in the economy. Consumption over some one’s life time cannot
exceeds his life time income unless that person is born wealth then according to Franco
consumption spending is financed by life time income and wealth.

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One important reason that income varies over a person life is retirement. Host people plan to stop
working at about age 65 and expect their income to fall when they retire. Yet they do not want
large drop in their standard of living, as measured by their consumption. To maintain
consumption after retirement, people must save during their working years (Mankiew, 2000).

Based on the life cycle hypothesis, when a household enjoys an increasing or decreasing in
income, there will be little effect on consumption.

2.2 Review of Empirical

2.2.1 Literature on Static Theory of Consumption Behavior
The empirical analysis of household consumption behavior pioneered by the work of Engel. He
in the mid-19th century proposed his famous law of consumption, which is formulated based on
the family budget studies of different countries.

The establishment of this law itself is thus taken as the first significant quantitative approach
contributed to the field.

In addition to this Zelalem Tesfaye, 2005, analyzed household consumption behavior in Addis
Abeba by using 871 HHs as a sample size with simple random sampling technique. His
methodology was both descriptive and econometrical. The variables that he used as explanatory
were HH income and family size. Accordingly, both explanatory variables affect HH
consumption positively. As mentioned in his paper subsequent studies by Bemnet and Woliams
(1996) using this law of consumption have proved that the share of food consumption in poor
countries is higher than that in rich countries and even with in a country it declines over time as
its national income raised. Several studies were also attempted to drive generalization about the
other categories of consumption, particularly for housing and clothing but the result lack
harmony by themselves to provide a universally accepted law like the one for food. Based on the
result obtained from Houthakekr (1957) employed the log liner model to estimate the income
elasticity’s for food, clothing and housing. Based on the result obtained from his study of
international comparison of consumption behavior, and by analyzing the evidence from earlier
studies, he reached the conclusion that income elasticity of food, clothing, housing and other
expenditures is 0.6, 1.2, o.8 and 1.6 respectively. Since then these figure served as basis of
comparison for results obtained in later works.

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 2.2.2 Literature on Life Cycle/ Permanent Income Theories
This theory was heavily dominated by the Euler’s approach using this approach; Hall and
Mishkin (1982) were the first to develop a model for micro data. This model enables them to see
whether consumers are, sensitive to current flection’s in income.

Being the first to implement the Euler’s approach to micro economic data, they drive the
statically estimable consumption function. As a first step, they run regression of income and
consumption on socio economic variables, including the reactive price variable to identify the
deterministic components from the residual term. Then, the residuals obtained from these
regressions are used to examine the dynamic relations that are theoretically expected to exist
between consumption and income. According to the permanent income theory, in the
consumption function in which the change in consumption is regressed on residual from
permanent income and transitory income variable, the coefficient of the latter should be close to
zero.

In addition to the above explanation a standard household model, households use their resources
(example: labor, skills, land and equipment) to achieve the highest level of intended utility
(satisfaction) possible, this decision could be determined by the income levels, preference and
market price,(Ruel et al,2005). Preference also affected by the composition of households, it
members knowledge and education habit and culture norms, personal experience and by
biological factors that affect hunger. The assumption that households pool resources and have a
single, set of preferences has been questioned by research on intra household allocation of
resources and gender row with in the household. Empirical researches have shown that the
husband and wife have often unequal control over resources that they may not pool income, and
that their consumption priority may differ. Some alternative households’ modes assume a
cooperative solution in which distribution of benefit depends on the bargaining position of each
based household. In general, the consumption patterns may vary with legal and socio economic
status of each partner and their ability to monitor each other’s behavior (Ouldsumbing, 2003)

Additionally, Tadess kuma, 2010, analyzed changes in consumption patterns in urban Ethiopia,
Addis Abeba by using working – lesser demand function as a dependent variable, per capital
income and other demand factors like dependence ratio, age and family dummy as independent

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variables. He used both primary and secondary data. According to his finding, age affects food
demand negatively.

The demand for high value food items (example: meat, milk vegetables and fruits) increase with
higher income. They are also expensive source of energy. This implies that poor households are
unlike to access them. This is largely because poor households prioritize to fulfill their basic
energy requirement to avoid hunger. This is mainly because high value food to be expensive
source of energy for them. Households with income near to subsistence level, consume large
quantities of grains and starchy staples and few fruits, vegetable, meat, milk, and milk products.
Consumer preferences on the other hand, shape the decision of consumer what to do consume or
not. Poor households, until they meet physiological need to satisfy hunger, they have little choice
but to focus on cheap sources of energy as grains and starchy staples. Once they satisfied their
basic energy needs, households start to diversify their diets by including animals’ food sources,
dairy products and fruits and vegetable (Ruel et al,2005 cited in Tadesss kuma, 2010)

Most previous studies (Taddesse Kuma , Zelalem Tesfaye, etc. ) reached from the following
results. First, there has been considerable improvements in frequency of food consumption
between 1994and 2004. Second, Ethiopians urban consumption pattern is shifting from
traditional stable and high value food items such as milk and milk products, meat and fruits. This
change in consumption pattern is stronger in Addis Ababa than others. Among others, share of
food expenditure spent on meat has registered a radical shift from about two percent in 1994 to
13 % in 2004. This is perhaps expected to continue to increase at a significant rate if current
growth momentum of economy maintained. Third, deviation in average monthly per capital food
expenditure between the poorest and the richest is exceedingly wide. The richest group has nine
times higher per capital expenditure on food compared to poorest. Fourth, the estimated income
elasticity of demand for stable foods is significantly lower than most non- stable high value food
products. This is may imply that food consumption pattern in urban Ethiopia is shifting from
stable grain commodities to non- stable and high value food products. Fifth, in addition to
income, food demand in urban Ethiopia is affected by regional and demographic variables that
are Gender, education, household size and age.

The empirical evidence explained above indicates that the determinants of household
consumption in many areas are similar but, some socio economic factors show different effect

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based on specific conditions of the study area. Even though the previous studies are so good,
they are not taken into account some determinants like disposable income, saving and some other
socio economic factors that determine household consumption pattern.

No studies under taken in Mekelle city to identify the socio economic and demographic factor
which determines the level of house hold consumption pattern. So that by taking the above
criticism in to consideration, the study worked out by adding variables like, disposable income
and into this analysis.

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 CHAPTER THREE
3. Discussion and Data Analysis
3.1 Determinant of Consumption
Most of the time, market price of a commodity and income (budget) of a household
considered as a major determinants of household consumption. But broadly thinking,
there are many other important determinants of consumption that we have seen in day
today activity of purchasing and consuming different consumption and none consumption
commodities. These are government tax, family size, income of household, weather
condition, education level, sex, age of household head, preference, saving of household
and other different demographic factors, among these and other factors of consumption
the following are considered as major consumption determinants in this study.

Household Disposal Income (Yd)

It is the income after tax 9net income of household from different source of income). It is
the most determinants of consumption compared to others. Most household’s income
especially those households, live in developing countries are shred consumption purpose.
Any change in disposable income may have effects on total expenditure. The direction of
the effect of this change depends on the income elasticity of the given commodity that is
the consumption pattern of welfare of the household.

The choice between income and expenditure as a better measure of welfare, the
household creates the argumentative issues. Even if, this issue is argumentative,
according to permanent income hypothesis consumption (expenditure) is a better
measurement of human living standards than income.

Family Size (Ni)

It is the total numbers of household members and the major determinants of consumption
next to disposable income. This is because; It is mostly related with human needs and
wants. Household consumption in relation with needs can be differ according to age and

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sex. It can be effective household size or absolute household size. Due to the absence of
findings a satisfactory and country specific weight, we lead to use absolute household
size than effective household size.

Age of Household Head (Age)

It is one part of determinants of household consumption behavior in the world.

Obliviously, age of population can be classified into three major groups, that is, children,
adult and old age. Even if, the study considers age of household, these age group have
their own contribution on household consumption level.

Table 3.1 Composition of HH Head’s Age and Education Level

No Age group No of HH Percentage

1 0-18 (children) 0 0%
19-65 (adult) 110 83.33%
>65 (old ) 22 16.67%
Education level of household
head
2 1-8 grade 25 18.93%
9-10 >> 22 16.64%
11-12 >> 23 17.47%
Above 12 >> 62 46.96%
Source: own computation survey

As a result, most household grouped under both adult and old age groups. According to
the above table 110(83.33%) of respondents are adult age and 22(16.66%) are old age.
This indicated that adults are more engage in production system with higher
consumption. Therefore, these age groups have either negative or positive effect on
household consumption level.

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Education Level of Household Head (Educ)

Education level determines household consumption level. Because when each household
start education, they need different tings or materials for achieving these objectives. On
the other hand, when they already educated, they know different items or commodities
that are available for consumption. This means that education level of a household has its
own effect on household consumption behavior (analysis).

From the above table, any household under this study area educated that is, at least they
can read and write. From respondents 25 (18.93%) are educated primary education (1-8
grade), 22(16.64%) are educated secondary education (9-10 grade), 23(17.47%) are
educated preparatory (11-12grade) and the remaining 62 (46.96%) are educated higher
education. Most household heads are grouped under higher education level. As a result,
we can conclude that household education (weather they are already educated or learning
now) has great on their consumption.

Household Saving Status (Si)

Saving is deposited income after consumption. According to Harrod- Domar, it is

considered (proportional) as investment. It is more sensitive for inters rate (its saving rate
is depends on interest rate of the financial institutions).

According to the data we have collected for this study from the total household
51(38.63%) of households has their own saving account in different financial institutions,
which is found In Mekelle town. From this, we can conclude that saving by itself has its
own negative contribution for household consumption.

4.2 Descriptive Analysis

In this section of the study, more attention is given to show the share of household’s
consumption expenditure on different commodities or items from the expenditure.

Fig 3.1 household consumption items

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 3.40% 8.61%

6.23%

7.14%
47.62%

5.74%

6.25%

14.74%

Source: own computation survey

The result of this study shows that the consumption patterns of each household in the
town distributed on different commodity items in the following table.

Table 4.2 percentage share of expenditure with sample size of 132.

No Expenditure items Percentage share

1 Expenditure on food 47.62%

2 Expenditure on housing 14.74%
3 Expenditure on cloth 6.52%
4 Expenditure on social, cultural life 5.74%
5 Miscellaneous expenditure 7.14%
6 Expenditure on school 6.23%
7 Expenditure on medical service 3.4%
8 Other expenditure 8.61%
Source: own computation survey

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Food

It is one the most basic needs for everyone to survive in life on the earth. It constitutes
around 47.62% of the total consumption expenditure of the household. It does not mean
that food is the one only consumption commodity rater it is compared to with others.
Mostly it is known that the share of consumption in poor countries are higher than that of
rich countries , but this gap declines (consumption share of poor countries decline) as its
national income increases.

Expenditure on Housing

It includes house building materials, maintenance and rent expenditure, which constitutes
14.4% of in the total household expenditure. This shows that most households (residents)
of Mekelle town spend high rent for housing.

This is due to the imbalance between the income they received and the cost of materials
for building, because of existence of price shocks (inflation) and lack accessibility of
land.

Expenditure on Cloth

Cloth including footwear is unavoidable expenditure item in nature. Because it is one of

the basic needs. As shown in the above table, it constitutes around 6.23% of the total
household expenditure.

Cultural and Social Life Expenditure

Based on the result above, this expenditure item (expenditure on different ceremonies,
donation religious institution, contribution to idir etc ) comprises 5.74% in the total
household expenditure. Culture and social heritages are one of major difficult for
economic development in least developing countries. Because this leads the household to
spent more of their income for such type’s of activities.

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Miscellaneous Expenditure

This category of expenditure item in the household expenditure includes water bill,
electricity bill, and telephone bill, and mobile card, which constitutes 7.14% of the total
household expenditure.

It is the fourth major consumption expenditure item from others.

School Fee

School fee (school fee, other educational expenditure example, fees for maintenance and
for school fence). It accounts 6.23% of the total household expenditure.

Now a day’s people know the importance of education for sustainable economic
development of the country and improve social economic welfare of the society as whole.
They give move attention for education for children in privet school in addition to
government schooling system. This leads the household to spent more income on school
fee.

Expenditure on Medical Services

It includes both modern and traditional medical system, which accounts 3.4% of the total
household consumption expenditure. This result shows that either the might be in-
household a position of good health condition or the household might use cheap medical
treatment system.

Expenditure on Other Goods and Services

This categories of expenditure item includes kitchen equipment, durable goods like (TV
and radio), fuel, utility personal care etc that constitutes 8.61% of the total household
consumption expenditure item next to food and housing. Durable goods are luxury,
expensive and server the household for long period of time.

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Table 3.3 Response about Investment

Item No of respondents Percentage (%)

Do you have a plan to
engage in investment activity
in near future?
Yes 30 22.72
No 102 77.28
Total 132 100
As show on the above table (3.3), 102(77.28%) of the respondents respond that they have no a
plan to engage in investment activity in near future; and the remaining 30(22.72%) of them
answered that they have a plan to engage in investment in near future, so from the responses it
can be implied that, most of respondents doesn’t have a plan to engage in investment, because of
high level of consumption (low level of saving).

Table 3.4 Response about Dependent Family

Item No of respondents Percentage (%)

Are there any families
dependent on you as source
of income?
Yes 32 24.24
No 100 75.76
Total 132 100

The above table (3.4) shows that, 32(24.24%) of sample respondents replied that there is no any
families dependent on them as source of income .and the remaining 100(75.76%) of respondents
answered that there is no any families dependent on them as source of income. this, implies that
most of the households are depend on their own source of income.

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Table 3.5 Response about Sufficient Income to Cover Consumption

Item No of respondents Percentage (%)

Do you think your families
have sufficient income to
cover their own
consumption?
Yes 48 36.36
No 84 63.64
Total 132 100

The above table (3.5) indicates that, 48 (36.36%) of sample respondents respond that their
family have sufficient to cover their own consumption and the remaining of 84(63.64%) of
sample respondents respond that their family have not sufficient income to cover their own
consumption, so we can infer that most of the respondents haven’t sufficient income to cover
their own consumption and they cover their finance gap by loan and donation from family.

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 3.2 Econometrical analysis
3.2.1 Model specification
As stated in the methodology of this study the model that used to analyze the household
consumption expenditure can be written (describe) as follows.

lnCT =β0+β1ydi +β2 Ni+β3 Educi+β4 Agei+β5 si+ β6odf + Ui

Table 3.6 regression result

r(198);

. gen lnct = log(ct)

. reg lnct age yd ni educ si odf

Source SS df MS Number of obs = 132

F( 6, 125) = 61.53
Model 44.2130131 6 7.36883551 Prob > F = 0.0000
Residual 14.969647 125 .119757176 R-squared = 0.7471
Adj R-squared = 0.7349
Total 59.1826601 131 .451776031 Root MSE = .34606

lnct Coef. Std. Err. t P>|t| [95% Conf. Interval]

age -.000468 .0032766 -0.14 0.887 -.0069528 .0060168

yd .0003104 .0000246 12.62 0.000 .0002617 .0003591
ni .0776586 .024421 3.18 0.002 .0293265 .1259908
educ .0399911 .011 3.64 0.000 .0182207 .0617614
si .1031123 .0663453 1.55 0.123 -.0281932 .2344179
odf .1630701 .0743769 2.19 0.030 .015869 .3102712
_cons 5.920213 .1750889 33.81 0.000 5.573691 6.266736

By using this estimation formula, the result of regression can be

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The format of total household function is specified as:-

lnct = 5.92021 + 0.03999 Educ + 0.000310Yd + 0.07765Ni - 0.000468Age + 0.103112Si+ 0.163070Odf

+ ui

(33.81) (3.64) (12.62) (3.18) (-0.44) (0.123) (0.030)

Note:- the numbers that attached in pare these is t-value.

As shown in table 4.3 above, most of the estimated coefficients have their own expected
result (signs).

The result shows that all the estimated coefficients expect age and saving status (si) are
highly statistically significant for their “p” value are extremely small.

The estimated coefficients are interpreted as follows. The coefficient of household

disposal income is significant at 5 % level of significant, including that, keeping other
things constant if disposable income of the household in Mekelle increased by 1 birr, the
mean consumption expenditure of the household increased by 0.0310% than the
previously monthly consumption expenditure level.

The coefficient of family size to household consumption is positive that is 0.0776. And it
is significant at 5% significant level, showing that if family size of household increase by
1 unit, mean consumption expenditure of each household increase by 7.70%.

The estimated coefficient of saving status of household is statistically insignificant, so

there is no need of interpretation for this insignificant variable. But we addressed this
variable by descriptive part of the study.

education level of each household head is significant at 5% significant level with a

coefficient of approximately 0.039, this implies that if the household head education level
(weather they are already educated or they are learning now) is increased by 1 year, the
mean consumption expenditure of household goes up by 3.9 percent.

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Additionally, other family dependent on household as source of income is significant at
5% level of significant. When the explanatory variable is dummy (differential), it takes
the anti-log of estimated coefficient as e 0.163-1x100 =17.7%. It implies that, households
who have other family dependent on their as source of income have 17.7% more than
who have not.

Even if age of house hold head is statistically significant at 5% significant level, the
coefficient of age of household on household consumption level is negative. This shows
that, as mentioned in descriptive part of the analysis most household engage in adult age
group, which are more productive, with high need of different instruments for production.
As a result as they transfer from adult age group to old age group their productivity as
well as their consumption becomes decreased. This coefficient shows this condition as a
whole.

Generally, age of household has negative contribution (effect) on household consumption

expenditure.

All the repressors have signs that accord with prior expectation except saving status that
is education level, family size, household disposable income, saving status household
both have positive contribution for household consumption expenditure. But age of
household head have a negative effect on household consumption expenditure.

Generally, household disposable income (yd), family size and education level of
household head has intuitively significant effect on household consumption level.

The constant term (B0) indicates that, autonomous consumption of house hold even they
have not their own income per month or whatever. These types of consumption come
from different sources like loan from different financial sector, which accounts 5.3% of
the total consumption expenditure.

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 3.2.2 Test
3.2.2.1 Overall level of significant test
The overall significance of the variable is tested by Prob > F. If Prob > F less than0.05
(5%) then the explanatory variables included in the model are jointly statistically
significant and the explained variable. As a result show Prob > F= 0.0000 then, it is
statistically significant.

The goodness of fit of the model is measured by coefficient of determination, which

shows the percentage or power of explained variable to express by the explanatory
variables. This is expressed by R –Square = 0.7471, which states that 74.71 percent of the
variable of the explained (dependant) variable is due to the variation of explanatory
variables included in the model and remaining variation (25.29%) is explained by
variables whi ch are not included in our econometrical model.

3.2.2.2 Diagnostic test

In this section of test, inter relationship between the explanatory variables. And natures of
the variance of error term were tested.

3.2.2.2.1 Multicollinearity
This is a method that shows the interpretation between the explanatory variables.

The presence of Multicollinearity affects the OLS estimator and make inefficient and
inconvenient. Therefore, it must be tested using variance inflation factor (VIF) method.
IT shows how the variance of estimator is influenced by the existence of
Multicollinearity. By using rule of thumb:

 When VIF > 10% or tolerance is close to 0, then, the explanatory variables are
correlated, accept alternative, has Multicollinearity problem.
 When VIF <10 % or tolerance is greater than zero, then accept the null
hypothesis, no Multicollinearity. Based on this decision rule, the result shows
bellow with no Multicollinearity problem.

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 The toleration /degree of tolerance/ can be determined by using

1 1
, < 10 → =0.72 which is less than 10. Then there is no Multicollinearity
mean vif 1.38
between the variables in the model.

Table 3.7 Vif Test

. vif

Variable VIF 1/VIF

age 1.64 0.610849

ni 1.62 0.616655
yd 1.47 0.679674
educ 1.24 0.807065
si 1.21 0.825214
odf 1.12 0.892996

Mean VIF 1.38

4.3.2.2.2 Heterosecedasticity
This test concerned with variation of variance. Then, the Breusch Pagan ( Cook-
Weisberg test for Heterosecedasticity are as follows

. hettest

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of lnct

chi2(1) = 0.50 30 | P a g e
Prob > chi2 = 0.4814
Decision rule: if prob> chi2 is greater than 5%, accept H0 rather not reject the alternative
hypothesis (accept alternative hypothesis). Therefore, there is no variation of variance
in the model.

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 CHAPTER FOUR
4. Conclusion and Recommendation

4.1 Conclusion
The study attempted that to show household consumption behavior in Mekelle town by
describing households, consumption expenditure item and by showing the effect of different
determinants of consumption like household disposable income, age of household head,
education level of household head, family size of the household, saving status of household and
existence of other family dependent on house hold as source of income.in this study 132
household are taken as a sample at random in two selected sub cities. To do this OLS estimation
is employed.

The descriptive part of the study result shows that households spent their income on eight major
commodity items. From the total budget of household, most part of the budget is used for
consumption purpose. From this, we can conclude that the saving habit of each household in the
town is low even if they participate in saving activity.

Because of this low saving habit most of town’s resident haven’t a plan to engage in investment
activities. And also most of households haven’t sufficient income to cover their own
consumption and they finance this gap by borrowing and donation from other households. We
can infer from this result, that the households spend their income for unnecessary and for
extravagant activities.

Adjusting and giving emphasis for such type of condition helps to achieve the goal of
government that are put under the statement of the problem like SDPRP and FYGTP. That is, it
is easy for the concerned body (government or public) to give solution for such types of goals
(achieving SDPRP, FYGTP and improve human living standard). As indicated in discussion
part, households spent their income for extravagant activities such as culture and social life.

The OLS result show that household consumption positively affected by disposable income,
family size, education level and existence of other family dependent on household as source of
income. On other hand, it is negatively affected by house hold head age. When we see the overall
significant of the model (R2 ) it is seems good fit. But it indicates that I left other explanatory
variables which are essential to determine consumption behavior.
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 4.2 Recommendation
After taking above result in to consideration, the study recommended the following ideas:

 Since household give more attention for consumption than saving, it needs a vast
investigation on household consumption behavior to enhance (improve) saving and
design proper policy for integrated economic development.
 During the consumption expenditure (budget expenditure) households are better to use
their own notebook (record habit of expenditure) because it is good for plan saving and
expenditure.
 Awareness should have given to the house hold to save part of their income and reducing
the extravagant and cultural consumption habit to enhance the sustainable development
of country.
 The government or food agency should set out various proclamation in relation with
household consumption behavior or pattern.
 Study in this area is a process, not the end. Then it gave the way to other interested bodies
to do the study on this area by including other explanatory variables which is very
essential for consumption determinant, not included in this study.

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 Reference
1. A.koutsoyiannis (1997). Modern Micro Economics University of ottawaoontario.
2. Dourn bush, (1975). Macroeconomics, consumption and saving Chicago University,
USA
3. Gujratati. D (2004). Basic econometrics, United States of America, Mc Graw-Hill
press.
4. Henery. J.Aaron .(2001) world book, vol.4 USA, Chicago
5. M. Gregory Mankiew (2000), Macroeconomics, Harvard University press.
6. R.Nelson and David ,(2010) , an evolutionary theory of HH consumption behavior,
Colombia university new York , USA and university of Manchester, UK
7. Robert Mc Henery ,(1968), economic theory world book, vol.17.
8. Sitotaw and Nigus, (2006), introduction to economics. AA, Kuraz international
publisher.
9. Soni, R.N (1995). Leading issues in agricultural economics theoretical and applied.
New Delhi
10. Tadesse kuma (2010). Analysis of change in food consumption patterns in urban
Ethiopia. Ethiopian development research institute AA, Ethiopia
11. Zelalem Tesfaye, (2005), analisis of household consumption behavior. Ethiopia,
AA university.

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 CHAPTER ONE
1. INTRODACTION....................................................................................................................................1
1.1 Back ground of study................................................................................................................1
1.2 Statement of the Problem.......................................................................................................2
1.3 Objective of the Study.............................................................................................................3
1.3.1 General objective...................................................................................................................3
1.3.2 Specific objective...................................................................................................................3
1.4 Significance of study................................................................................................................3
1.5. Scope of Study.........................................................................................................................3
1.6 Data source and Methodology................................................................................................4
1.6.2 Data source and collection Strategies...................................................................................4
1.6.1.2 Data type and source of data..........................................................................................4
1.6.1.3 Sampling Technique........................................................................................................4
1.6.2 Methodology..........................................................................................................................4
1.6.2.1 Method of data analysis.................................................................................................4
1.6.2.1.1 Model specification..................................................................................................5
1.6.2.1.2 Description and Expected Sign of the Variables......................................................5
CHAPTER TWO
2. Review of Literature...........................................................................................................................8
2.1 Review of Theoretical Literature.............................................................................................8
2.1.1 An Evolutionary Theory of Household Consumption Behavior...............................................8
2.1.2 Theories of Consumer Behavior............................................................................................11
2.1.2.1 Approaches to the Analysis of Consumer Behavior.....................................................11
2.1.2.1 A. Cardinal Utility Approach.....................................................................................11
2.1.2.1B. Ordinal (In Difference Curve) Utility Approach.....................................................12
2.1.2.1C.The Permanent Income Hypothesis........................................................................13
2.1.2.1D.The Life Cycle Hypothesis.......................................................................................13
2.2 Review of Empirical................................................................................................................14
2.2.1 Literature on Static Theory of Consumption Behavior........................................................14
2.2.2 Literature on Life Cycle/ Permanent Income Theories........................................................15
CHAPTER THREE
3. Discussion and Data Analysis............................................................................................................18

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 3.1 Determinant of Consumption................................................................................................18
3.2 Econometrical analysis...........................................................................................................26
3.2.1 Model specification..............................................................................................................26
3.2.2 Test.......................................................................................................................................29
3.2.2.1 Overall level of significant test.....................................................................................29
3.2.2.2 Diagnostic test...........................................................................................................29
3.2.2.2.1 Multicollinearity.................................................................................................29
4.3.2.2.2 Heterosecedasticity............................................................................................30
CHAPTER FOUR
4. Conclusion and Recommendation....................................................................................................32
4.1 Conclusion..............................................................................................................................32
4.2 Recommendation...................................................................................................................33
Reference..............................................................................................................................34

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