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Interdependence between consumption and human capital in the context of ordinal theory of consumer behaviour

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Category: Economy and management

Last Updated on 08 February 2016

Published on 08 February 2016

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Authors:

O.O. Sukhyi, Cand. Sci. (Econ.), Associate Professor, Lviv Academy of Commerce, Senior Lecturer of the Department of Economics, Lviv, Ukraine.

Abstract:

Purpose. To reveal comprehensively the linkages between human capital and consumption and determine the influence of not only income but also human capital on the quantity and structure of consumption; to explain the mechanism of those linkages and their role in achieving sustainable development.

Methodology. The following methods and approaches were applied: ordinal theory of consumer behavior, in particular “income-consumption” curve, Engel's law, human capital theory.

Findings. The main factors influencing the scope and the structure of consumption are the cash income of an individual and his/her human capital. To display the active contribution of the human capital in the sustainable development, through eco-socio-ecology balanced consumption and investment, and a high degree of passionarity of human capital we have proposed the term “isoutility curve” and gave the rationale for its use instead of the traditional approach of “indifference curve”. The meaning of superior goods is extended from a narrow economic approach (which is based only on consumer’s income) to a broader ecological and socio-economic interpretation, which takes into account the environmental and social impacts of consumers’ choices that are influenced by their increased human capital. Some neoclassical approaches of the ordinal human behavior theory were modified and the graphical models of the theory were used to show the changes in consumers’ preferences resulted by the human capital accumulation and corresponding transformation in consumer equilibrium.

Originality. A fundamental concept of the curve “human capital-consumption” was suggested. In contrast to the traditional curve “income-consumption”, it highlights the impact of the human capital on consumption as due to changes in the income and through consumer preferences. Education as an investment in the human capital appeared to be an important factor for the consumers to rationalize consumption patterns (along with revenue and price effects) and to achieve sustainable development through reorientation of consumer preferences in favor of environment-friendly products.

Practical value. The ways of adapting Engel's law to the modern expansion of service industry were covered. The mechanisms and evaluation of mankind progress on the path of sustainable development was proposed to be measured through the role of human capital and consumer preferences according to the position on the curve “human capital - consumption” and taking into account not only increased income of consumers, but also environmental and social impacts of the human capital investing.

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