2.2.2 - Consumption Flashcards
What is consumption?
Spending on consumer goods and services over a period of time.
What are some factors affecting consumption?
- interest rates
- income
- inflation
- consumer confidence
- taxes
- how much they want to save
- wealth/savings
- value for money
- availability of credit
What is saving?
The act of forgoing consumption.
What is the savings ratio?
Saving / disposable income.
What is mps?
Marginal propensity to save, the proportion of disposable income which is saved.
What are some reasons for saving?
- retirement
- precautionary saving
- to acquire wealth
- high interest rate = high reward
- deposit for a house/car
What is the relationship between disposable income and consumption?
There is generally a positive relationship between disposable income levels and consumption.
What is the relationship between saving and consumption?
Generally, as consumers save more, they consume less and vice versa. Consumption and saving are inversely related.
How do interest rates impact consumption levels?
As interest rates rise, consumers are incentivised to save, due to increased return, therefore consumption falls. The cost of borrowing also rises, reducing consumption levels. May lead to decreased house prices, as mortgages become more expensive, creating a negative wealth effect.
How does consumer confidence impact consumption?
Higher consumer confidence leads to higher levels of consumption eg. if they are worried about losing their job they are less confident or if shares and house prices are rising they will be more confident to consume.
How does wealth effects impact consumption?
Changes in the economy may cause wealth effects that influence consumption levels. For example, rises in house prices can cause real spending increases if people decide to trade in their increased wealth or feel confident in spending. Similarly, falling share prices may cause people to reduce consumption levels.
