2.2.2 Consumption (C)

Question 1

What is a consumers marginal propensity to consume?

Answer 1

How much a consumer changes their spending following a change in income.

This will usually be poorer people.

Question 2

What is a consumers marginal propensity to save?

Answer 2

The amount of each additional pound of household income that goes into savings.

Question 3

What is the Wealth Effect?

Answer 3

If people who own assests like houses see the price of their home rise - they feel wealthier and more secure therefore they are likely to spend more.

Question 3

What are the 2 key influences on Consumer Spending?

Answer 3

• Interest Rates
• Consumer Confidence

Question 4

What is a consumers housing equity?

Answer 4

The difference between the market value of a property and amount of mortgage left over.

If house prices increases, consumers experience a rise in equity and are spending less on their mortgage then what their house is worth - also leading to the “Wealth Effect”.

This can occur with other assets such as shares.