2.2.2 Consumption

What is Consumption?

Is the spending by households on goods and services in an economy.

What is Disposable income?

Disposable income is income after all tax deductions have been made such as National Insurance and income tax.

What can Higher Disposable income do?

Increase consumer expenditure.

What is savings?

Savings is money put aside for later use.

If Savings increase what happens to consumption?

Decrease

What does interest rates mean?

The cost of borrowing money and the reward for saving money.

What happens when interest rates are high?

If interest rates are high, it means people that borrow money from a bank must pay the bank a higher interest rate, which can reduce disposable income.

What happens when interest rates are low?

If interest rates are low, the borrower would pay the bank less interest which would mean the borrower has more disposable income left.

What are the 4 main factors that affect consumption?

Inflation

Interest Rates

Income Tax

Other living Factors

How does inflation affect consumption?

If there is anticipated inflation, this means goods and services are likely to increase in price in the future, which can stimulate short-term consumption.

How does interest rates affect consumption?

Higher interests rates encourage the incentive to save, which can reduce consumption.

How does income tax affect consumption?

Higher taxes reduces disposable income which can decrease consumption.

How do other costs of living affect consumption?

If the cost of utilities increase this can reduce consumption.

What does Consumer Confidence mean?

The positive outlook that consumers have leading to higher levels of consumptions. E.g. high economic growth or rising house prices may encourage consumer confidence.

What does wealth effect mean?

When assets appreciate in value leading to consumers "feeling richer" increasing the level of consumption.