Consumption

Question 1

MPC (Marginal Propensity to Consume)

Answer 1

MPC = Change in consumption / Change in disposable income

Question 2

APC (Average Propensity to Consume)

Answer 2

APC = Total consumption / change in disposable income

Question 3

Keynes APC Theory

Answer 3

Keynes believed that APC would decrease as real income rises. This is because households will be able to save a higher proportion of any increase in income, the more income they have. (e.g. those on very low wages spend a larger percentage of their income, thus can save less)

This theory hasn’t been as successful in the UK. In the last 20 years, real income has doubled, yet APC has barely changed

Question 4

Factors affecting consumption

6

Answer 4

Income

Real Interest Rates (low interest rates encourages spending)

Consumer confidence (e.g. if a consumer is optimistic about their future income holding or increasing, they may be more likely to spend i.e. lease a car.)

Inflation/deflation (inflation would encourage spending

Wealth (more wealth means more expenditure)

Credit Availability - Recent deregulation of banks means borrowing is far more common. Consumption can increase even when income doesn’t