2.2 - Consumption

Question 1

Disposable income

Answer 1

The income left over for an individual or household after taxes have been paid. It is a crucial determinant of consumer spending

Question 2

Relationship Between Disposable Income and Consumer Spending:

Answer 2

• Generally, as disposable income increases, consumer spending tends to rise.
• This relationship is explained by the marginal propensity to consume (MPC), which is the proportion of an additional dollar of income that a consumer spends.

Question 3

Marginal propensity to consume

Answer 3

This is a measure of how much (the proportion/percentage) of any increase in household incomes is consumed or spent

Question 4

Real world example:
During an economic (1) , people may experience a (2) in disposable income due to job losses. This can lead to a reduction in (3) , negatively impacting businesses.

Answer 4

1. downturn
2. decrease
3. consumer spending

Question 5

Understanding the Relationship Between Savings and Consumption

Answer 5

• Savings are the portion of income that is not spent on consumption.
• There is an inverse relationship between savings and consumption:

> When consumers save more (increase savings), they spend less on consumption.
When consumers save less (decrease savings), they spend more on consumption.

Question 6

Real world example:
During economic (1) , people often feel more financially secure and may (2) their savings rate, leading to increased consumer (3) on items like luxury goods, travel, and dining out.

Answer 6

1. booms
2. reduce
3. spending

Question 7

Other influences on consumer spending other than disposable income and saving

Answer 7

• interest rates
• consumer confidence
• wealth effects

Question 8

Interest rates

Answer 8

The ‘price’ of money. What you must pay to borrow or what you earn when you lend money
- Lower interest rates tend to stimulate consumer spending because borrowing costs are reduced.

Question 9

Consumer confidence

Answer 9

Consumer confidence reflects the optimism or pessimism of consumers about the future of the economy.

• Higher consumer confidence generally leads to increased consumer spending, as people are more willing to make major purchases when they believe the economy is doing well.

Question 10

Wealth effect

Answer 10

The effect on a household’s consumption when the value of assets such as homes or stocks increases or falls.

• When the value of assets rises (Eg: house prices) consumers wealth increases and so consumers tend to feel wealthier and spend more.