2.2.2 Consumption Flashcards

1
Q

Define consumption (consumer spending)

A

is spending on consumer/household good/services

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2
Q

What are the main sources of income for households

A

wages

savings

interest on investments

pensions

benefits

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3
Q

What are factor returns/factor rewards

A

Incomes from providing factors of production

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4
Q

What is the factor return/reward for labour

A

wages

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5
Q

What is the factor return/reward for land

A

rent

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6
Q

What is the factor return/reward for capital

A

interest

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7
Q

What is the factor return/reward for providing entrepreneurship

A

Profit

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8
Q

What is the marginal propensity to consume (MPC)

A

is the change in spending following a change in income

(change in consumption/change in income)

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9
Q

What are the 5 factors that affect Consumer spending

A

Real Disposable Income

Employment and Job security

Household Wealth

Expectations and Sentiment

Interest rates

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10
Q

How does ‘real disposable income’ affect consumer spending

What is real disposable income

What can affect rates of income

A

Income adjusted for inflation and after direct taxes and benefits

changes in real income have the greatest impact on consumption

As if a person receives an increased salary, their consumption is likely to increase with it

Income can also be affected by inflation and changes in taxation

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11
Q

How will ‘Employment and job security’ affect consumer spending

A

Rising confidence (animal spirit) will cause people to spend more even if their income does not rise, because they are more confident in retaining their jobs and being able to borrow and pay off debt

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12
Q

How will ‘household wealth’ affect consumer spending

What can increased household wealth be due to

A

i.e. increasing value of house price/asset/share prices

a rise in wealth can increase consumer demand - known as the wealth effect

can be due to: rising wealth leading to rising confidence; positive equity, if households spending rises and release more equity from their assets; remortgaging, or paying the full amount of incurred debts

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13
Q

How can ‘Expectations and Sentiment’ affect consumer spending

Where can uncertainty in an economy rise

A

Uncertainty causes spending to fall, improving ‘animal spirit’ will raise demand

Uncertainty can come from: fears of rising unemployment, expectations of higher taxes

Also effecting any planned spending

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14
Q

How can ‘market Interest rates’ affect consumer spending

What will happen if interest rates rise/fall

A

Interest rates affect both the incentive to save and the cost of borrowing

  • Higher interest rates make it more expensive to borrow and raise the incentive to save, therefore consumer

spending will fall

  • On the other hand, lower interest rates make it cheaper to borrow and reduce the incentive to save, therefore consumption will rise
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15
Q

What is as Keynesian economists refer to as ‘animal spirit’

A

Consumer confidence, around customer attitudes around economic situations and household financial situations, also including views on making major purchase

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16
Q

What is debt financing

A

borrowing money from outside sources with the promise of paying back the loan, plus interest, at a later date

17
Q

What is a secured loan

A

Money you borrow that is secured against an asset you own, usually your home

18
Q

What is an unsecured loan

A

The money supported only by a borrower’s creditworthiness

19
Q

Total household debt in the UK rose sharply from the late 1900s until the financial crisis began in 2008

Why did the household debt proportion decrease once the financial crisis began

A

banks were much more reluctant to lend money and consumers were less inclined to take out credit, with some focusing to pay off existing loans in these difficult economic conditions

20
Q

Define saving

Define saving in terms of household income

A

Saving occurs when people decide to postpone consumption until a future time

Saving is a household disposable income that is not spent

21
Q

List a few ways money can be saved

A

accounts in banks and building societies accounts

savings in pensions and in stock market

22
Q

What is the saving ratio, for households

A

measures the amount of money, households have available to save as a percentage of their total disposable income - this can also be called the average propensity to save (APS)

23
Q

A high saving ratio, does what to consumption and demand

A

Lowers consumption

lowers aggregate demand

24
Q

Key factors that affect household saving

A

Real interest rates

Price expectations

Availability of credit

Job security

Consumer confidence

Taxations of savings

25
Q

What are the 3 main importances of saving

A

Business survival

Funding investment

Buffer of financial resources for consumers

26
Q

Explain why ‘business survival’ is an important effect of savings

A

Corporate savings provide a cushion during a recession when sales and revenue are falling

Business saving can be used as finance for takeover and for capital investment projects

27
Q

Explan why ‘funding investment’ is an important effect of saving

A

Commercial banks need saving deposits from which they can lead to borrows

Saving flow into pensions funds - which can be reinvested in stocks for investment funds

28
Q

Explain why ‘buffer of financial resources for consumer’ is an important effect of saving

A

Saving can smooth consumption during rough economic times

They allow people to reduce their debts

Key source of retirement income

Allows consumption of big-ticket items i.e. household appliances

Allow to build up deposits for a mortgages