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Everybody wants to live a life with full of comfort, so to maintain that comfort level, people plans their consumption, saving according to their income. They want to maintain such a standard, that they can continue in their entire lifetime and lead a comfortable life.
Thus here according to life cycle consumption theory the consumer plans his consumption in such a way:-
Consumer income various systematically over people lines and that saving allows people to move income from those times when income earned is high to those where income earned is love by saving and dis-saving.
The main reason of income varies over a period of life is retirement. Everybody wants to maintain the same level of consumption after retirement so people save during their working years and dis-save after the of retirement. The consumption of a people depend on the wealth and income of the entire life.
The wealth and income is not proportionately in short run but in long run wealth and income more proportionately and thus it should the consumption puzzle that in short run when income rise consumption fall and APC falls but in long ren APC tends to constant.
Thus life cycle consumption theory proves a better theory of consumption here consumption is plan of the entire lifetime.
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19 Comments. Leave new
Very well explained Preeti.
Nice job, Preeti!
Well written 🙂
Being an economics student, I could relate to it. I totally agree with what you have written but dont you feel that the theory doesn’t talk about what happens when the rational consumer doesn’t know about the future income or any chance regarding the same, e.i. assymetric information on part of the consumer or more generally irrational expectations.
ya ,you are right but every theory is not a perfect theory ,future expectations and many more are the disadvantages of the theory that’s y economist always prefer mix policies rather than stuck to one, according to market conditions
Sorry Preeti, I couldn’t understand the article. Maybe a liitle more simpler language next time.
I will try my best next tym ,so that non economic students can also understand what its all about
Well explained..good job
Good job!
Nice concept!
Being an economics student, I can think of it as a short and sweet explanation for the way we live! Well done!
Good article
nice topic 🙂
very well written 🙂
Very well explained! Good job !
Interesting as well as unique.
Well written
Got something new to read 😀
GOod work 😀
Interesting article
Interesting 🙂