Consumption Flashcards
What is consumption?
The spending of households on goods and services.
What is disposable income?
The proportion of a household’s income that is spent.
What is the marginal propensity to consume (MPC)?
The proportion of extra income that is spent on the consumption of goods and services.
What is the formula for MPC?
MPC = change in consumption/change in income
What is the average propensity to consume (APC)?
A measure of the average proportion of income that is spent on consumption across an economy.
What is the formula for Average Propensity to Consume (APC)?
APC = consumption/income
Define savings
The part of disposable income not used to consume.
What is the marginal propensity to save (MPS)?
The proportion of any extra income that is saved.
What is the average propensity to save (APS)?
The average proportion of income that is saved across an economy.
What are the influences on household saving (5)?
1) Level of income.
2) Inflation.
3) Interest rates.
4) Consumer expectations.
5) The average age of population (middle-aged people most likely to spend as they earn the most, on average)
How does consumer confidence influence consumer spending?
If consumers are confident about the performance of the economy or their future earning potential, they are more likely to spend more.
How do interest rates influence consumer spending?
An increase in interest rates (1) encourages consumers to save more and (2) makes borrowing more expensive, so consumers are less likely to take out loans to pay for expensive goods, such as cars, whilst already existing loans, such as a mortgage, become more expensive.
What is physical wealth?
physical assets such as cars and property.
What is monetary wealth?
Money in the bank, cash and stocks.
How does the wealth effect influence consumption?
As wealth increases in the short-term, e.g. the value of property rises, consumers are more likely to spend as they are backed by an appreciating asset.
