2.2.2 Consumption

Question 1

define consumption

Answer 1

how much consumers spend on goods and services

Question 2

define disposable income

Answer 2

the amount of income consumers have left over after taxes and social security charges (ie NI, pension contributions) have been removed

Question 3

where might consumer income come from

Answer 3

wages, savings, pensions, benefits and investments

Question 4

describe the relationship between disposable income and consumption

Answer 4

positive

Question 5

name the five factors affecting the level of consumption

Answer 5

disposable income, interest rates, levels of personal debt, levels of personal wealth, confidence

Question 6

explain how disposable income affects consumption

Answer 6

higher levels of disposable income will normally lead to greater levels of consumption as individuals can afford more goods and services
disposable income will change depending upon, for example, tax or wage rates

Question 7

explain how interest rates affect consumption

Answer 7

lower interest rates will normally increase consumption as saving becomes less attractive, loans become more affordable and individuals with variable mortgages see monthly disposable income rise
generally, as consumers save more, they spend less

Question 8

what type of income is affected by interest rates

Answer 8

discretionary income

Question 9

what is the savings ratio

Answer 9

gives an idea of the average extent of saving for all households in an economy. it is calculated as the % of disposable income that is saved

Question 10

explain how levels of personal debt affect consumption

Answer 10

if individuals have low levels of personal debt e.g loans, they will normally consume more as less disposable income is devoted to repayments

Question 11

explain how levels of personal wealth affects consumption

Answer 11

individuals with higher levels of wealth will tend to consume more as they can borrow funds against the value of their assets

the Pigou effect occurs when consumers increase consumption due to an increase in the value of assets such as house prices. this would lead to higher output and increased employment

Question 12

explain how confidence affects consumption

Answer 12

if individuals have confidence in their short, medium and long term economic prospects, it is likely they will increase their spending
this is often linked to employment prospects and job security

Question 13

what is meant by marginal propensity to consume and marginal propensity to save

Answer 13

this refers to how likely an individual is to consume or to save an extra £1 of income they receive
it is usually dictated by a combination of the factors affecting consumption
additional income will either be consumed or saved

Question 14

is saving a component of AD

Answer 14

no, but the level of saving in the economy has a direct impact upon the level of consumption, and therefore on AD

Question 15

what is the main assumption about saving and spending in economics

Answer 15

any disposable household income that is not used for consumption is said to have been saved