2.2.2 - Consumption

What is consumption?

All the spending done by households on goods and services

Does an increase in consumption increase or decrease AD?

An increase in C leads to an increase in AD

What is disposable income?

The after-tax income of households

What effect does an increase in disposable income have on consumption?

An increase in disposable income leads to C increasing.

What effect does a decrease in interest rates have on consumption?

Lower interest rates lead to more C as savings become less appealing and the cost to borrow money is cheaper

What is the relationship between consumption and savings?

Inverse proportional

What effect does an increase in confidence have on consumption?

If households are confidence that their incomes will rise in the future then they are less likely to save their income and more likely to spend. Therefore C increases

What effect does an increase in the wealth effect have on consumption?

If the value of existing wealth increases, households tend to spend more on goods and services. Therefore C increases

What effect does an increase in taxation have on consumption?

Higher taxes decrease disposable income so therefore C decreases

What is the MPC?

The marginal propensity to consume is the proportion of additional unit of income that a person recieves which is spend in consumption expenditure

What is the MPW?

The marginal propensity to withdraw is the proportion of an additional unit of income that a person receives which is withdrawn from the circular flow

What is MPW made up of?

MPS + MPT + MPM

What is the multiplier effect?

When an injection enters the circular flow of income the size of the final change in AD is greater than the size of the change or initial injection

The flow of income of one participant becomes their expenditure, which in turn becomes income for someone else

What are the formulas to work out the value of a multiplier?

1 / MPW or 1 / 1 - MPC or 1 / MPS + MPT + MPM