2.2.2 - Consumption

Question 1

What Is Consumption?
(2 Points)

Answer 1

~ Total spending by households on goods and services in the economy.

~ Make up around 60% of AD in the UK.

Question 2

What Is MPC?
(2 Points)

Answer 2

~ Marginal propensity to consume.

~ The willingness of a household to spend any extra income that they earn.

Question 3

What Factors Can Affect Consumption, Independent Of The Price Level?
(4 Points)

Answer 3

~ Level of real disposable income.

~ Interest rates.

~ Consumer confidence.

~ Asset prices.

Question 4

Describe ‘Level Of Real Disposable Income’ As A Factor Effecting AD
(2 Points)

Answer 4

~ Disposable Income -> Income left after taxes and national insurance has been paid.

~ Increased disposable income -> cut in income tax or a rise in wages -> increases the level of real disposable income -> increases the level of MPC -> increasing consumption. Vice versa.

Question 5

Describe ‘Interest Rates’ As A Factor Effecting AD
(2 Points)

Answer 5

~ Cut -> cost of borrowing falls -> rate of return on saving falls -> increases incentive for consumers to go and borrow money -> increases consumption.

~ Rise -> greater incentive to save and less to borrow -> decreasing consumption.

Question 6

Describe ‘Consumer Confidence’ As A Factor Effecting AD
(2 Points)

Answer 6

~ Higher confidence -> higher MPC -> increasing consumption.

~ Lower confidence -> lower MPC -> decreasing consumption.

Question 7

Describe ‘Asset Prices’ As A Factor Effecting AD
(2 Points)

Answer 7

~ More wealth -> more likely to spend due to a higher MPC -> increasing consumption.

~ Less wealth -> less likely to spend due to a lower MPC -> decreasing consumption.

Question 8

What Is The Relationship Between Savings & Consumption?
(2 Points)

Answer 8

~ As savings increase, consumption falls.

~ As savings decrease, consumption rises.