2.2.2 Consumption

Question 1

What is the most important factor in determining the level of consumption?

Answer 1

Disposable income

Question 2

What is the Marginal Propensity to Consume (MPC)? (2)

Answer 2

• A consumer’s marginal propensity to consume is how much a consumer changes their spending following a change in income.
• Low-income people tend to have a higher MPC as they are likely to spend much more of their increase in income whilst richer people are more likely to save it.

Question 3

What is the Average Propensity to Consume (APC)?

Answer 3

APC is the average amount spent on consumption out of total income.

Question 4

What is the equation for MPC?

Answer 4

MPC = Change in consumption / Change in income

Question 5

What is the equation for APC?

Answer 5

APC = Total consumption / total income

Question 6

What are savings?

Answer 6

Savings is what is not spent out of income

Question 7

What is the Marginal Propensity to Save (MPS)?

Answer 7

The marginal propensity to save (MPS) is how much of an increase in income is saved

Question 8

What is the Average Propensity to Save?

Answer 8

The average propensity to save (APS) is the average amount saved out of income.

Question 9

What is the equation for MPS?

Answer 9

MPS = Change in savings / Change in income

Question 10

What is the equation for APS?

Answer 10

APS = Total savings / Total income

Question 11

Interest rates on consumer spending (2)

Answer 11

• If the Monetary Policy Committee lowers interest rates, it is cheaper to borrow and reduces the incentive to save, so spending increases
• Lower interest rates also lower the cost of debt, such as mortgages. This increases the effective disposable income of households.

Question 11

Interest rates on consumer spending: (2)

Answer 11

• If the Monetary Policy Committee lowers interest rates, it is cheaper to borrow and reduces the incentive to save, so spending increases
• Lower interest rates also lower the cost of debt, such as mortgages. This increases the effective disposable income of households.

Question 12

Consumer confidence on consumer spending: (2)

Answer 12

• If consumers have higher confidence levels, they spend more because they are less concerned about needing to save for future difficulties. This is affected by anticipated income and inflation.
• If consumers fear unemployment or higher taxes, consumers may feel less confident about the economy, so they are likely to spend less and save more. This delays large purchases, such as houses or cars.

Question 13

What is the wealth effect|?`

Answer 13

A change in consumption following a change in wealth

Question 14

Wealth effects on consumer spending: (2)

Answer 14

• People with greater wealth tend to have greater levels of consumption
• A consumer’s housing equity is the difference between the market value of a property and how much loan is remaining to be paid. If house prices increase, consumers experience a rise in equity, so they might be paying less on their mortgage than the house is worth on the market. This makes consumers feel wealthier, so they are more willing to spend.

Question 15

Distribution of income on consumer spending:

Answer 15

If money is moved from the rich to the poor, consumption is likely to increase as the poor have a higher MPC (as they spend a higher proportion of their income

Question 16

Tastes and attitudes on consumer spending:

Answer 16

• In the modern society there is a strong materialistic drive that encourages people to spend