2.2.2 Consumption (C)

Definition of consumption

Spending by households on goods & services

What are the 4 factors of consumption

• Level of disposable income = Income left to spend by households after taxation is taken

• Interest rates (affects savings/borrowings)

• Consumer confidence = willingness of households to spend based on current/future economic conditions (jobs, wage rates)

• Wealth Effect = willingness of households to spend based on the value of assets they own

(Share prices affect wealth effect NOT consumer confidence)

An understanding of the relationship between savings & consumption

• Higher real income - more money to save - MPS increases

• Higher real income - more consumer confidence - MPC/consumption increases - MPS decreases

How to show a shift in AD

The table showing the effects of the factors of consumption on consumption and hence, on AD