Measurement and evaluation study
Study author: Yedidya Lau
Published Date: 01/12/2018
Published in: The Hebrew University of Jerusalem

The role of ‘needs’ in the economic theory of consumption: directions from data from economically distressed households

The economic theory of consumption today does not attach importance to the concept of ‘needs’. The study argues that in classical economic thought of the 18th-19th centuries, the concept did play a significant role, explains how the transition to a modern economic concept based on ‘utility’ led to the disappearance of the concept, and suggests that even today the concept of ‘needs’ is important.
The researcher then provides an indication of the importance of the concept of ‘needs’ for a better understanding of consumption behavior.

The study compares the expenditure data of households in economic distress, provided by Paamonim, to the expenditure data of the general population, provided by the Central Bureau of Statistics.
It was found that people in economic distress spend more, relatively speaking, on categories that are intuitively perceived as ‘needs’ and relatively less on categories perceived as ‘luxury’. Still, when asked to cut back on their spending, paamonim households, on average, prefer to cut back on ‘luxury’. In other words, even though households know that their expenditure is higher than income, they choose not to reduce their expenditure on ‘needs’. This finding seems to contradict the economic forecast according to which a person maximizes utility according to income, and points to the importance of understanding “needs” in order to understand different consumption patterns.

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