AD Consumption Flashcards
What is consumption
it is the amount households spend on goods and services to satisfy their current wants
what are the influencing factors of consumption
- wealth effect
- inflation
- rate of interest
- availability of credit
- expectations and confidence
- age composition
- taxes
- APC, MPC and MPS
how does wealth effect influence consumption
increase in value of consumers’ possessions (i.e. increase in price of houses) = increase in perceived wealth = consumers feel richer = encourages them to spend more = increase in consumption
how does inflation influence consumption
inflation rises = average price of goods is increasing = discourages people to consume = consumption tends to fall (BUT NOT FOR NECESSITIES)
how does rate of interest influence consumption (2)
- interest rate increases = gain more when you save = encourage consumers to save NOT SPEND = increase APS = consumption falls
- interest rate increases = loan debt will increase for consumers = decrease disposable income = decrease in consumption
how does availability of credit influence consumption
it is easier consumers to get credit cards = pay later = don’t need to have the spending money immediately = encourage consumer to spend more = consumption will increase
how does expectations and confidence influence consumption
if confidence for future increases = consumers are likely to spend more
how does age composition influence consumption
high proportion of middle aged consumers = middle aged have the most money = they spend the most = increase in consumption
how does taxes influence consumption (2)
- indirect tax = increase in costs of production = businesses want to protect their profit margins = higher selling price = discourage consumers to spend = decrease in consumption
- income tax = less disposable income = consumers less to spend = decrease in consumption
what does APC stand for
Average Propensity to Consume
what does APC show
the proportion of consumers’ disposable income do they spend
how do you calculate APC
consumption / income
what does MPC stand for
Marginal (extra) Propensity to Consume
what does MPC show
proportion of changed income that is spent (how much of the extra money would you use to consume)
how do you calculate MPC
change in consumption / change in income
