2.2.2 Consumption Flashcards
Define consumption (consumer spending)
is spending on consumer/household good/services
What are the main sources of income for households
wages
savings
interest on investments
pensions
benefits
What are factor returns/factor rewards
Incomes from providing factors of production
What is the factor return/reward for labour
wages
What is the factor return/reward for land
rent
What is the factor return/reward for capital
interest
What is the factor return/reward for providing entrepreneurship
Profit
What is the marginal propensity to consume (MPC)
is the change in spending following a change in income
(change in consumption/change in income)
What are the 5 factors that affect Consumer spending
Real Disposable Income
Employment and Job security
Household Wealth
Expectations and Sentiment
Interest rates
How does ‘real disposable income’ affect consumer spending
What is real disposable income
What can affect rates of income
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
How will ‘Employment and job security’ affect consumer spending
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
How will ‘household wealth’ affect consumer spending
What can increased household wealth be due to
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
How can ‘Expectations and Sentiment’ affect consumer spending
Where can uncertainty in an economy rise
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
How can ‘market Interest rates’ affect consumer spending
What will happen if interest rates rise/fall
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
What is as Keynesian economists refer to as ‘animal spirit’
Consumer confidence, around customer attitudes around economic situations and household financial situations, also including views on making major purchase