Consumption Flashcards
Consumption
Total planned household spending on goods and services
Factors affecting Consumption
Bank of England base rates
Consumer confidence
Disposable Income
Inflation
Interest Rates
Income Tax (VAT + NI)
Wealth Effect (House Prices)
MPC
Exogenous Factors (e.g. natural disasters)
Weather
Welfare benefits
Durable Goods
Manufactured items, typically cars or household appliances, that are expected to have a relatively long useful life after purchase
Big Ticket Items
Non-durable Goods
Items which are consumed in one or a few uses
Expendables
Services
The intangible equivalent of an economic good
Leisure activities - cinema or a concert
How changes in Income Tax affects Consumption
Increase in income tax = less disposable income so consumption will decrease
How changes in Interest Rates affect Consumption
If there is an increase in interest rates, there will be less borrowing as cost of borrowing has risen
An increase in Interest Rates makes saving more attractive and increases saving as higher return
How changes in Wealth affects Consumption
If a increase in house prices or value of stocks and shares occurs, consumers feel wealthier and are likely to feel confident enough to increase their consumption (Wealth Effect)
How changes in Expectations / Consumer Confidence affects Consumption
Savings Ratio increases due to low confidence
Consumers will spend less and save more during a recession as the economy is at a lower level as prices and inflation might rise
How changes in Household Indebtedness affects Consumption
The extent that consumers are willing and able to borrow money affects consumption
If it is easy to borrow money and interest rates are low then it is likely that households will take on more debt
Consumption will increase
How changes in Savings affects Consumption
People / Firms save because:
It provides a safety net for the future
Confidence might be low
It can build wealth
Disposable Income equation
DI = personal income - personal tax liability
