Why is investment spending more sensitive than consumption? 

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Investment spending is more sensitive to changes in things like income and consumer confidence because it is much more of an optional thing than consumption.

Much consumption (but not all) is necessary and cannot really be put off.  A family must pay its rent or its mortgage so that it continues to have lodging.  It must continue to buy food.  It must continue to buy school supplies for its children.  All of these expenses and more are not truly optional.  Therefore, even when the family’s income drops, consumption does not drop drastically.

By contrast, investment is completely optional.  Of course, it is very important to save for retirement.  However, if a family fails to invest in the short term it does not typically see any of the consequences of that failure.  Failing to pay into an IRA does have consequences, but they are much less immediate than failing to pay the rent.

Therefore, the incentive to consume is much higher than the incentive to invest and consumption is less affected by changes in such things as income.

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