3.2 Consumption Flashcards
What is consumption?
Consumption is the purchase of goods and services for the direct satisfaction of individual or collective needs. It accounts for a significant portion of GDP (aggregate demand).
What is the opposite of consumption?
The opposite of consumption is saving.
What is the Marginal Propensity to Consume (MPC)?
The MPC is a measure of how much additional consumption is associated with a rise in disposable income. MPC = (Change in Consumption) / (Change in Income).
What is the Average Propensity to Consume (APC)?
The APC is a measure of the average consumption level in relation to disposable income. APC = (Total Consumption) / (Total Disposable Income).
What were Keynes’s views on the relationship between disposable income and consumption?
Keynes believed that there is a strong relationship between disposable income and consumption.
What were Friedman’s views on the relationship between disposable income and consumption?
Friedman suggested that increases in real income only influence consumption if they are believed to be permanent (the Permanent Income Hypothesis).
What is the impact of house prices/household wealth on consumption?
Wealth can impact consumption in different ways. A sustained fall in house prices might cause a decrease in personal wealth and spending, while rising house prices cause a positive wealth effect, encouraging spending. The wealth effects of rising real asset values on consumption are difficult to quantify but important.
What is the impact of inflation on consumption?
Inflation can impact consumption by decreasing the real value of money wealth, causing households to save more and reducing consumption. Deflation (falling prices) can also have a negative impact on consumer spending by reducing purchasing power and increasing the real value of debt.
What is the impact of consumer confidence on consumption?
Higher consumer confidence will encourage people to spend more, as they are more confident in their future incomes and willing to borrow and spend more.
What is the relationship between saving and consumption?
Consumption and saving are directly related. If consumers become more pessimistic and increase savings, then consumption will tend to decrease.
What is the impact of interest rates on consumption?
Interest rates can impact household spending by affecting the incentive to save and the cost of borrowing. Higher interest rates can decrease consumption by reducing the level of savings and increasing the cost of borrowing.
What is the impact of availability of credit on consumption?
If credit is easily and cheaply available, consumption can increase as people supplement their current income by borrowing.
