Factors that influence spending patterns of small to medium sized enterprises (SME) and consumers

The level of economic activity

Natural fluctuations of GROSS DOMESTIC PRODUCT (GDP) indicates level of economic activity

GDP

•Gross (total value)

•Domestic (within country)

Product (final goods and services, undergoing no further production)

Expansion Describe

Increase in consumer confidence and demand

Expansion explain

• Willing to pay higher prices because full employment and wage growth

• High = +4%

Expansion leads to

• Business higher sales revenue

• Higher profit margins

DUE TO: ability to charge higher prices

Contraction Describe

• Decrease in consumer spending and confidence.

• Minimal price rises (eg petrol)

• Below 2%

Contraction explain

Consumer fear loss of jobs during a contraction- casual hours reduced, and layoff may occur as sales decline in business

What influences spending

Business – spending more on wages and increase production

Consumers – higher disposable income = luxury products

Interest rates

cost of borrowing money

Expansion interest rates

• RBA uses to slow economy

• As interest rates increase rents and mortgage repayment increase (housing necessity/need)

• People have less discretionary spending

Contraction interest rates

• RBA uses to encourage spending.

• As interest rates decrease rents and mortgage repayment decrease (housing necessity/need)

• People have more money left for discretionary spending.

Unemployment

% of labour force ready and looking to work

Expansion affecting unemployment

• workers needed for increase production

• Fewer people without jobs

• Low below 4%

CONTRACTION affecting unemployment

• Workers lose jobs as production slows.

• High above 6%

if economic activity is strong (expansion), people will feel

secure in their jobs and believe they will have stable income.

If economic spending is high this increases confidence =

higher levels of spending.

during expansion Consumers are more likely to use debt for major purchases because

because they are confident, they will be able to pay it off.

During expansion Consumers are more likely to purchase more

Luxury items

If the economy is weak (contraction),

people will be worried about their jobs and part-time and casual workers may have their work hours reduced.

During contraction consumers less confident =

 reduced spending

during contraction consumers are more likely to

purchase cheaper items

During contraction consumers are more likely to focus on

needs rather than wants.