Circular flow and consumption

Circular flow of income. Give an example

A model showing how money, goods and services move between households and firms in an economy.

E.g Households supply labour to firms and get wages, which they then spend on goods and services

Injection

Give example

Money flowing into the circular flow that increases economic activity

E.g Investment, government spending and exports

Withdrawal 

Give example

Money leaving the circular flow that reduces economic activity

E.g Savings, taxes and imports

Savings

Give example

Part of disposable income that households do not spend on consumption

E.g Putting £110 into a bank account

Tax

Give example

A compulsory charge by the government on income, goods or spending

E.g Putting £100 into a bank account

Investment

Give example

Spending by firms on capital goods to increase future production

A business buying new machinery

Government spending

Give example

Expenditure by the government on goods, services and welfare

E.g Spending on healthcare or education

Imports

Give example

Goods and services brought from abroad

E.g Uk buying cars form Germany

Exports

Give example

Good sand services sold to foreign countries

E.g UK selling financial services to the USA

Aggregate Demand (AD)

Give example

The total demand for goods and services in an economy at a given price level: AD = C +I + G + (X-M)

Consumption

Give example

Household spending on domestic goods and services

E.g buying UK milk

Households

Give example

Consumers who supply factors of production (like labour) and demand goods/ services

E.g Families buying groceries and providing labour

Firm

Give example

Businesses that produce goods and services using factors of production

E.g A bakery producing break

Income

Give example

Money received by households for providing factors of production

E.g Wages, rent or interest

Marginal Propensity to consume (MPC)

Give example

The proportion of extra income that is spent on consumption

E.g If income rises by £100 and £80 is spent , MPC = 0.8 (80/100= consumption (C)/ income (Y))

Marginal Propensity to Save

Give example

The proportion of extra income that is saved

E.g If income rises by £100 and £20 is saved, MPS = 0.2 (20/100 = money saved (S) / Income (Y))

Consumer confidence

Give example

The degree of optimism households have about future income and the economy

E.g If people expect job security, they are more likely to spend

Disposable income 

Give example

Income available to households after taxes and benefits

E.g Take-home pay after income tax and National Insurance

Interest Rates

E.g 

The cost of borrowing money or rewards for saving

E.g A loan with a 5% annual interest rate

Wealth effects

E.g

When changes in the value of assets influence consumption and saving

E.g Rising house prices make homeowners feel richer, so they spend more