Consumption Flashcards
Definition Of Marginal Propensity To Consume
Measures how much more individuals will spend for every additional dollar of income they recieve.
MPC Equation ?
Change in consumption / change in disposable income.
Definition Of Average Propensity To Consume
Measures the percentage of income that is spent rather than saved.
APC Equation ?
Consumption / disposable income.
What Factors Determine Savings and Consumption Rates ? (6)
Interest Rates
Individual Preferences
Inflation
The Composition Of Households
Economic Uncertainty
Income
Definition Of Durable Goods
Goods consumed over a long period of time.
Definition Of Non-Durable Goods
Goods consumed almost immediately.
How Does Interest Rates Determine Saving And Consumption Rates ?
• Households rarely finance expenditures on non-durable goods by borrowing
• Higher interest rates = higher repayment of goods monthly
• Households react by reducing their demand for durable goods
• Means less consumption
How Does Inflation Determine Savings And Consumption Rates ?
1: If households know prices will rise in the future, they’ll bring forward purchases currently.
2: Rise in inflation erodes real value of wealth. Households react by trying to restore real value of their wealth (more saving).
How does the composition of households determine savings and consumption rates ?
• Younger = they spend more and move into debt to finance the setting up of their homes / children
• Middle = have more income available and have more saving to prepare for retirement.
How does economic uncertainty determine savings and consumption rates ?
The more confident the consumer, the more they consume non-durable goods.
• If consumers expect their goods to be better in the future = they maintain / increase spending.
• consumer confidence decreases during recession.
How does income determine saving and consumption rates ?
If one’s salary increases, the economic theory predicts consumption of their household will rise, as they have more spending power.
Definition Of Savings
Portion of households disposable income which is not spent over a period of time.
