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
What is debt financing
borrowing money from outside sources with the promise of paying back the loan, plus interest, at a later date
What is a secured loan
Money you borrow that is secured against an asset you own, usually your home
What is an unsecured loan
The money supported only by a borrower’s creditworthiness
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
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
Define saving
Define saving in terms of household income
Saving occurs when people decide to postpone consumption until a future time
Saving is a household disposable income that is not spent
List a few ways money can be saved
accounts in banks and building societies accounts
savings in pensions and in stock market
What is the saving ratio, for households
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)
A high saving ratio, does what to consumption and demand
Lowers consumption
lowers aggregate demand
Key factors that affect household saving
Real interest rates
Price expectations
Availability of credit
Job security
Consumer confidence
Taxations of savings
What are the 3 main importances of saving
Business survival
Funding investment
Buffer of financial resources for consumers
Explain why ‘business survival’ is an important effect of savings
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
Explan why ‘funding investment’ is an important effect of saving
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
Explain why ‘buffer of financial resources for consumer’ is an important effect of saving
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
