1
Q
What is consumption?
A
Spending on goods and services by households.
2
Q
Factors affecting consumption?
A
D - disposable income
I - income distribution
I - interest rates
C - consumer confidence
T - tastes and attitudes
W - wealth effect
3
Q
Disposable income
A
More disposable income, spending increases so consumption increases
4
Q
Marginal propensity to consume
A
- the proportion of additional disposable income spent on consumption
MPC = change in consumption / change in disposable income
5
Q
Average propensity to consume
A
- the average amount spent by households on consumption out of the total income of a population
APC = total consumption / total income
6
Q
I - income distribution
A
- higher income, lower MPC, they can save a greater proportion of their income. They also have more disposable income, so consumption increases
- lower income, higher MPC, they have to spend a greater proportion of their income. Less disposable income, so consumption decreases
7
Q
I - interest rates
A
- interest rates higher, prices increase, most things bought on credit, so interest rates higher so they have to pay more back, not affordable, so consumption decreases
- if consumers expect interest rates to decrease, they will delay purchases because it will be cheaper for them
8
Q
C - consumer confidence
A
- confidence increases (if they think their wages will rise), spending increases, consumption increases
9
Q
T - tastes and attitudes
A
- people want the newest, best, things in trend (materialistic) spending will be more, consumption increases
10
Q
W - wealth effect
A
- people think they are more wealthy, they have more confidence
- homeowners, for example, house prices increase, house worth more than mortgage so they can borrow more against their house if they face financial difficulty, confidence increases, spending increases, consumption increases
Macroeconomics
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