- Consumption is the purchase of goods and services for the acquisition of current utility.
- Investment is expenditure on capital goods for the acquisition of future utility. Investment increases the capital stock.
Examples of the difference between consumption and investment
- A householder buys a car so that they can travel around to work and leisure activities. This is consumption
- A firm purchases a van so that it can make its deliveries to consumers.
Impact of consumption and investment
Consumption increases current utility and leads to higher living standards in the short-term. Investment will require less current consumption but can enable higher living standards in the long term.
This shows a trade off for an economy between consumer goods and capital goods. If the economy moves from point A to point B, it gains 190 capital goods, but there is an opportunity cost of 80 less consumer goods. In the short term, there is less consumption, but the increase in capital goods may enable the PPF curve to shift outwards.