Consumption - AD Flashcards
What is disposable income?
Disposable income is the money consumers have left to spend, after taxes have been taken away and any state benefits have been added
What is marginal propensity to consume?
MPC is the fraction of the increase in an income that they spend on consumption. Poorer people tend to have a higher MPC as they are likely to spend more of their income whereas richer people are more likely to save it
What is average propensity to consume?
The average amount spent on consumption out of a total income in an economy. This is usually less than one as people like to save some of their earnings
What is the formula for MPC?
MPC = Change in Consumption///Change in Income
What is the formula for APC?
APC = Total Consumption///Total Income
What are savings?
Savings is what is not spent out of an income. In a sense, it is inversely proportional to consumption as an increase in consumption leads to a decrease in savings
What is marginal propensity to save?
MPS is the fraction of an increase in income that is not spent but is saved
What is average propensity to save?
APS is the proportion of income that is saved rather than spent on goods and services
What is the formula for MPS?
MPS = Change in savings///Change income
What is the formula for APS?
APS = Total Savings///Total Income
What influence consumer spending?
Interest rates, Consumer confidence, Wealth effects, Distribution of income, Tastes and attitudes
How do interest rates affect consumption?
Interest rates are the most major expenditure on credit (borrowed money), so an increase in interests increases the cost of big purchases and decreases aggregate demand
How does consumer confidence effect consumption?
If people are confident about the future and expect pay rises, then they will continue or increase their spending. If inflation is expected to rise, spending will increase
