Consumption

Question 1

how can we classify consumption? (different types of consumption)

Answer 1

• distinguish between spending on goods or services
• spending between durable goods (continue to provide a service, e.g. car) or non-durable goods (used there and then, ST, e.g. ice cream)

Question 2

what factors determine how much a household consumes? and what is the most important? (Keynesian)

Answer 2

• disposable income (most important)
• interest rates
• consumer confidence
• wealth
• inflation

Question 3

what is the consumption function

Answer 3

the relationship between the factors that determine consumption and consumption

Question 4

calculation for the marginal propensity to consume

Answer 4

change in consumption / change in income

Question 5

how do interest rates effect consumption?

Answer 5

high interest rates make the goods more expensive as paying back amount is now higher - demand reduces, consumption drops

• increased mortgage repayments - cut spending
• less borrowing

Question 6

how does consumer confidence effect consumption?

Answer 6

if consumers expect their situation to stay the same in the future, they will maintain or increase their spending as they have confidence . if they have no confidence, will hold back on purchase of non-essential goods
-deteriorates during recession, increases in boom

Question 7

how does wealth effect effect consumption?

Answer 7

if wealth of a household increases then consumption will increase = wealth effect
-if physical wealth (houses) increases then households feel able to increase spending as they can borrow money against the house - happened in UK 1990s-2007
if monetary wealth (stocks and shares) increases spending will increase as people feel like they have more money

Question 8

how does income effect consumption?

Answer 8

when people have more disposable income, they spend more

Question 9

how does inflation effect consumption?

Answer 9

• if households expect prices to be higher in the future, then they will make their purchases sooner
• but inflation reduces the real value of money wealth and so households react by saving to try a restore value

Question 10

what are the determinants of savings?

Answer 10

same as consumption just the other way round