Friedman’s Theory of Consumption

Friedman’s Theory of Consumption, known as the Permanent Income Hypothesis, suggests that people's spending habits are influenced more by their long-term income expectations than by their current income. In other words, individuals consider their lifetime earnings when deciding how much to consume, rather than just their immediate financial situation. This means that if someone expects to earn more in the future, they may spend more today, while those expecting lower future earnings might save more. This theory helps explain consumer behavior and the relationship between income, savings, and spending.