A market economy is assumed to be dominated by the decisions and demands made by consumers, of the types and quantities of goods and services to be produced. This power of consumers is often referred to as "consumer sovereignty." Through the operation of consumer sovereignty, consumer income levels determine the types of production that occur in an economy.

Consumption is the act of spending household income on consumer goods and services to provide a source of utility, and is the most important spending component accounting for about 60% of all expenditure in Australia. It depends primarily on income which arises mostly from the sale of labour, which depends on how much is produced. Income which is not used for consumption must be saved or paid as taxes. This means that given a definite level of income, any increase in consumption will cause an equal reduction in the level of...