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-this theory was developed by Milton Friedman in the 1950s, who called it the permanent income theory of consumption, and by Franco Modigliani, who called it the life cycle theory of consumption
CONSUMPTION (THEORY OF CONSUMPTION)
Transformations of the World Economy
- Agricultural Revolution
- Industrial Revolution
- Information Revolution
-production process starts to evolve around the division of labour as the size of the production increases
-development of industries in Europe and North America with new creations of energy
-new shifts in production with more flexibility (just in time), new working schedules, added value goods, international division of labour and market segmentation
-introduces to notions such as the creativity rather than the production of goods, literally skills in order to increase communication and profits to a certain extend.
-economic system in which resources and the means of producing goods are privately owned.
Three Features of Capitalism
- Private Ownership of Property
- Pursuit of Personal Profits
- Free Competition, Consumer Sovereignty and Markets
-dominated by consumers who pick up goods and services within the best quality value
-economic political system in which all members of the society are all equal
-economic and political system that combines significant government control with free elections
-economic and political system in which companies are privately owned but cooperate closely with the government
Three Features of State Capitalism
- Government owns the most important sectors for the good of people.
- Various regulations from the government.
- Taxation is a tool in order to share the benefits of production.
-economic activity spanning many nations of the world with little regard for national borders.
Consequences of Global Economy
- Global division of labour by region of the world.
- Increasing number of low paid workers in the poorer countries in the world.
- Small number of business control of the world's economic activity.
-system of political beliefs based on free markets and individualism
-created by Margaret Thatcher in which there must be a system to renew the role of the government in the economy
Two Concepts of Thatcherism
- Privitizing all nationalized industries.
- Introduce internal market within the welfare of the state for schools and health care.
The Changing Nature of Work
- Rise of Unemployment
- Rising number of hours work per week
- Labour force participation regarding age
From Agricultural Work to Service Work
- Farming to Corporate Business
- Industrialized Society
- Knowledge Society
- European Middle Class Society
Dual Labor Market
- Primary Labour Market
- Secondary Labour Market
- Concept of Alienation by Marx
Gender Issues at Work
- Increasing number of women in work
- Occupational gender segregation
- Domestic labour
- Feminisation of agricultural works
-sum of financial wealth and housing wealth
-present value of expected after-tax labor income
-sum of human health and nonhuman health
-total wealth ÷ expected remaining life
CONSTANT LEVEL OF CONSUMPTION
Shifts in the Consumption Function
- Consumer and saving habits
- Size of the population
- Income distribution
- Credit availability
- Expectations of change in prices
- Expectations of future income
- Interest rates
Determinants of family income
- Educated attainment of the head of the family and its members
- Household savings
-there is a relationship between the amount of income and proportionate change in consumption expenditures as income level shifts
ENGEL'S LAW (ERNST ENGEL)
Types of Investment
- Gross Investment
- Investment (flow variable)
- Capital (stock variable)
= Net Investment + Depreciation
=durable equipment, new buildings, increase in inventories
INVESTMENT (FLOW VARIABLE)
=equal to the amount of accumulated investment as of a given point in time
CAPITAL (STOCK VARIABLE)
Determinants of Investment
- Business investment in durable equipment
- Inventory Investment
- Residential construction
-refers to the expected present discounted value of profits
-refers to current profit, or the net flow of cash the firm is receiving