2.2.2 Consumption

Question 1

Define consumption (consumer spending)

Answer 1

is spending on consumer/household good/services

Question 2

What are the main sources of income for households

Answer 2

wages

savings

interest on investments

pensions

benefits

Question 3

What are factor returns/factor rewards

Answer 3

Incomes from providing factors of production

Question 4

What is the factor return/reward for labour

Answer 4

wages

Question 5

What is the factor return/reward for land

Answer 5

rent

Question 6

What is the factor return/reward for capital

Answer 6

interest

Question 7

What is the factor return/reward for providing entrepreneurship

Answer 7

Profit

Question 8

What is the marginal propensity to consume (MPC)

Answer 8

is the change in spending following a change in income

(change in consumption/change in income)

Question 9

What are the 5 factors that affect Consumer spending

Answer 9

Real Disposable Income

Employment and Job security

Household Wealth

Expectations and Sentiment

Interest rates

Question 10

How does ‘real disposable income’ affect consumer spending

What is real disposable income

What can affect rates of income

Answer 10

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

Question 11

How will ‘Employment and job security’ affect consumer spending

Answer 11

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

Question 12

How will ‘household wealth’ affect consumer spending

What can increased household wealth be due to

Answer 12

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

Question 13

How can ‘Expectations and Sentiment’ affect consumer spending

Where can uncertainty in an economy rise

Answer 13

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

Question 14

How can ‘market Interest rates’ affect consumer spending

What will happen if interest rates rise/fall

Answer 14

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

Question 15

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

Answer 15

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

Question 16

What is debt financing

Answer 16

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

Question 17

What is a secured loan

Answer 17

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

Question 18

What is an unsecured loan

Answer 18

The money supported only by a borrower’s creditworthiness

Question 19

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

Answer 19

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

Question 20

Define saving

Define saving in terms of household income

Answer 20

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

Saving is a household disposable income that is not spent

Question 21

List a few ways money can be saved

Answer 21

accounts in banks and building societies accounts

savings in pensions and in stock market

Question 22

What is the saving ratio, for households

Answer 22

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)

Question 23

A high saving ratio, does what to consumption and demand

Answer 23

Lowers consumption

lowers aggregate demand

Question 24

Key factors that affect household saving

Answer 24

Real interest rates

Price expectations

Availability of credit

Job security

Consumer confidence

Taxations of savings

Question 25

What are the 3 main importances of saving

Answer 25

Business survival

Funding investment

Buffer of financial resources for consumers

Question 26

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

Answer 26

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

Question 27

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

Answer 27

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

Question 28

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

Answer 28

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