2.2.2 consumption Flashcards
define consumption?
total spending by households on goods and services in the economy
formula to calculate AD?
C+I+G+(X-M)
What factors can affect the consumption level of real disposable income?
the level of real (adjusted for inflation) disposable (income left after taxes have been paid) income
e.g if income taxes have been reduced in the economy-it will lead to an increase in real disposable income-which will increase the marginal propensity to consume-thus increasing consumption
what factors affect consumption?
interest rates-if cost of borrowing reduces then rate of savings will fall- this increases the incentive for consumers to borrow money( cheaper)- thus an increase normal goods
e.g mortages consumers have to pay montly mortagages if interest rates are low then these repayments will be cheaper- it will affect consumers who have a lower disposable income they will benefit
what is the problem with interest rates?
the availability of credit if it’s low then it can reduce the impact of borrowing- if credit is low then banks will be disincentivized to lend which will affect C.
what factors affect consumption-consumer confidence?
if there is high consumer confidence-they will have a higher marginal propensity to consume- which means job prospects and level of employment can affect consumer confidence.
what factors affect consumption-asset prices?
how wealthy people feel-the likelier they are to spend money-the higher the marginal propensity consume-e.g house prices and share prices- if these prices are going up then individuals who hold these assets the wealthier they feel it’s not like their income levels are increasing.
what factors affect consumption- household debt?
if it’s huge families living in debt they will have a higher marginal propensity to save in fear of losing a job or interest rates rising which means there will be a fall in consumption.
