Video Transcript: Investment and Consumption

Hello, welcome back. In this video, we're going to be discussing investment and  consumption. So, if we take a look at what I've written out here, we can detail  some of the uses and sources of investment and consumption. Okay, so on a  micro level, investment we can see is how are we as individuals going to invest  and how are we going to consume, right? So investment, look, our home, we  make an investment in our home, it's an appreciating asset, potentially, right. So  that is an investment we can gain equity from our home, right now. Let's look at  bonds, right. A bond is a different type of investment, right. We are going to  invest a certain sum of cash today in return for an amount, a specified amount of cash in the future, right. So we're making an investment in a municipality, which  is your local government, a state government, US government, corporate bonds, we could buy them, right, banking CDs, right. So we can invest in a bond, right,  to what, help us grow our individualized wealth, right. So we have to remember  that microeconomics is a study of economics on an individual in a tide basis,  right. Okay, so we're looking at household investment and consumption, right.  So education, okay, I'm investing in my education, you're investing your time and your opportunity cost in this course to invest in your education, right? So you're  taking your time, your resources, right, to study this, right, to better yourself and  prepare yourself in the future. Okay, now everybody knows what consumption is, I'm sure, right, but we need to realize the difference, and why we need to make  the right decisions in investment and consumption. Right, we need to know how  much of what we can consume, right? How often? Okay, so any kind of  spending on fixed goods, right, except for new homes, right, can be considered  consumption. Okay, on an individual level, right. We spend money on education, on our automobiles, right, on goods and services, okay. Going out to eat, buying  groceries, right. We're going to consume those type of things, right. We're going  to consume our internet usage, we're going to consume the tickets that we buy  for the theater, for example. Okay, these are types of consumption, okay, but  now let's look at economic investment, okay, economic investment is capital  equipment, right, PPE, right, plant property equipment, right, those are those are economic investments, okay, now inventory in our company, right. This is from  we're looking at from an individualized firm's perspective, right. That's still micro. We're not looking at the overall economy, we're looking at a specified firm. Okay, notice the term micro, okay, was individualized. Now the inventory that goes into our business right now. That is also an economic investment. We're going to buy the raw materials, the factors of production. We're going to produce a good, and  therefore we'll have inventory as a finished product. So, therefore, all of those  materials that are purchased to create our inventory are therefore economic  investments, right. So, even structures, okay? Structures could be bridges, toll  roads, you know, waterways, things that will help us transport our inventory after they're purchased, right, by consumers. Okay, so economic consumption, right?  Any spending on fixed goods by households, except for new homes, right? So, 

so anything that we go on to the market and buy more of is going to create  demand, right? And therefore, the supply of whatever consumption product that  we have, the more demand that there is in the marketplace for that the greater  the supply will be. Okay, so we're going to do the differences between everyday  investment and consumption and economic investment and consumption. In  economics, consumption refers to activities that directly provide utility, or utility in economics is known as a benefit, right? So that directly provides utility or benefit to people, whereas investment refers to the accumulation of capital goods.  Okay, inputs that contribute. To production over over a more or less long  lifespan, all production is ultimately aimed at enhancing someone's utility or  benefit. Okay, so you might reasonably think of the distinction between  consumption and investment as the difference between utility now and more  utility later, right? So, if we are investing, we are going to obtain our utility or our  benefit later in the future, right? Because we're going to be returned some  greater sum of money. Okay, but if the utility, as being seen as used now, is  obviously the consumption phase. Okay, we're going to get our utility now,  because we're going to consume whatever good or product that we are  purchasing, and therefore we are getting the benefit right now. Consumption  goods are divided between consumer durables and non-durables. Non durables, think food, are used up in the process of consuming them, whereas  durables are furniture, residential housing, cars, appliances, books, etc. are not.  Instead, they provide a flow of utility or benefit over time. In that sense, the  same object could be an investment good or a consumer durable, depending on how it is used. For example, a refrigerator used to keep a family's food fresh  would be counted as a consumer durable, whereas if it were used by a shop  selling food to the public, it would be counted as a part of that shop's capital,  right? Because they're using that as a source of income, they're refrigerating  their materials to sell to the public. Therefore, it's an investment, a capital  investment. Whereas, if I was to bring a refrigerator in my home, right, that  would be a consumer durable. Okay, another borderline issue applies to  education to the extent that the student is learning skills that will allow her or him to be more productive and thus earn a higher income in the future. Economists  would describe that as investment in human capital. In contrast, if she is simply  taking courses because she enjoys them or finds them intellectually stimulating,  she's engaged in consumption. In practice, it can be quite difficult to tease these two motives apart.