2.2.2 Consumption

Question 1

What is disposible income?

Answer 1

(Y) is the money consumers have left to spend , after taxes have been taken away and any state benefits have been added. This means that disposable income is affected by government taxation as well as wages.

Question 2

What is the most import factor determining levles of consumption?

Answer 2

Disposible income. Those who are earning a large income will be able to spend much more than those on a minimum wage.

Question 3

What is MPC?

Answer 3

A measure of the proportion of an increase in income that a person or household is likely to spend on consumption (goods and services) rather than save.

Question 4

How do you calculate MPC?

Answer 4

MPC= Change in consumption/ Change in income

Question 5

What is the realtion between the MPC and income as a factor in consumption

Answer 5

MPC will detwemine how much an increase in income effects consumption.

Question 6

What does a positive MPC mean?

Answer 6

An increase in income increases spending but spending doesn’t increase by as much as income.
- For most people, MPC will be positive but less than 1.

Question 7

What does an MPC of more that 1 mean?

Answer 7

They use borrowing or savings to fulfil the demand
for goods which is higher than their increase in income.

Question 8

Poorer people tend to have a ___ MPC as…

Answer 8

higher MPC they are likely to spend much more of their increase in income whilst richer people are more likely to save it.

Question 9

What is average propensity to consume (APC)

Answer 9

The average amount spent on consumption out of total income.
-In an industrialised country, the APC for the economy is likely to be less than one as people save some of their earnings.

Question 10

How do you calculate APC?

Answer 10

APC= Total Consumption/total income

Question 11

What are savings?

Answer 11

What is not spent out if income.

Question 12

What is the realtionsip between consumption and savings?

Answer 12

An increase in consumption decreases savings so the same factors which affect consumption are those which affect savings- but in the opposite way. For example, a rise in confidence will decrease
savings.

Question 13

What is the marginal propensity to save (MPS)?

Answer 13

How much of an increase in income is saved

Question 14

What is average propensity to save (APS)?

Answer 14

The average amount saved out of income.

Question 15

How do you calculate MPS?

Answer 15

MPS= Change in savings/ Change in income

Question 16

How do you calculate APS

Answer 16

APS- total savings/total income

Question 17

List the main Inflences on consumer spending (other than saving).

Answer 17

1) Interest rates
2) Consumer confidence
3) Wealth effects
4) Distribution of income
5) Tastes and attitudes

Question 18

How does Interest rates influence consumer spending?

Answer 18

• Most major expenditures are bought on credit so therefore the interest rate will affect the cost of the good for consumers.
• If interest rates are high, the price of the good will effectively be higher since more interest needs to be paid back and this will lead to a reduction in consumption.
• High interest rates also increase mortgage repayments so reduce consumption.
  -Also, a rise in interest rates decreases the value of shares and so people experience a negative wealth effect.

Question 19

How does Consumer confidence influence consumer spending?

Answer 19

-What they think will happen in the future. If people are confident about the future and expect pay rises, then they will continue or increase their spending.
- Expectationsabout a change in the taxation level will affect consumption: if consumers expect tax to increase prices in the future, they will buy now whilst if they expect it to reduce prices in the future, they will delay their purchases.
- Similarly, expectations on interest rates will affect consumption: if consumers expect interest rates to fall they may delay their purchases as things on credit will be cheaper.

Question 20

How does Wealth effects influence consumer spending?

Answer 20

• Wealth is a stock of assets. People with greater wealth tend to have greater levels of consumption, known as the wealth effect: a change inconsumption following a change in wealth.
• The wealth effect is experienced when real house prices rise as owners now have more wealth so are more confident with spending as they know that if they go into financial difficulty they could simply borrow more against the house, since their house is worth more than their current mortgage.
• It can also be experienced when share prices rise as people may sell some of their shares and spend the money or may be more confident in spending the money they have as they know they have the shares to fall back on in case of financial difficulty.
• Greater wealth will improve a consumer’s confidence and thus lead to greater spending.

Question 21

How does Distribution of income influence consumer spending?

Answer 21

• Those on high incomes tend to save a higher percentage of their income than those on low incomes and so a change in the distribution of
  money in the economy will affect the level of consumption.
• If money is moved from the rich to the poor, consumption is likely to increase as the poor have a higher MPC.

Question 22

How does Tastes and attitudes influence consumer spending?

Answer 22

• Materialistic drive that encourages people to have the newest and the best and therefore spending can be very high, in some cases even above income.
• If people were less materialistic, consumption would decrease.

Question 23

• If they expect high levels of inflation in the future, they will ______ ______ as it will be at a cheaper price, so consumption will ______.
• If they expect a recession and fear possible unemployment, consumption will _____ as people may ________

Answer 23

buy now, increase, decrease, save more.