chapter 13 consumption

What is consumption in economics?

Household spending on final goods and services.

What is the consumption function?

A curve that shows the relationship between income and consumption levels.

What is marginal propensity to consume (MPC)?

The fraction of additional income that households spend on consumption.

What is saving in economics?

The portion of income that is not spent on consumption.

What is the Rational Rule for Consumers?

Consume more today if the marginal benefit of spending now is greater than the future benefit of saving and spending later.

What is the Permanent Income Hypothesis?

Consumers base their spending on their expected long-term income rather than just current income.

What is consumption smoothing?

The idea that people prefer a stable and predictable consumption path over time, avoiding large spending fluctuations.

What are the three types of consumers in real-world spending behavior?

Consumption Smoothers, Credit-Constrained Consumers, Hand-to-Mouth Consumers.

How does a temporary rise in income affect consumption?

Consumption Smoothers: Small increase. Hand-to-Mouth Consumers: Large increase. Total Consumption Impact: Intermediate increase.

How does a permanent rise in income affect consumption?

Consumption Smoothers: Large increase. Hand-to-Mouth Consumers: Large increase. Total Consumption Impact: Large increase.

How does an anticipated rise in income affect consumption?

Consumption Smoothers: No change. Hand-to-Mouth Consumers: Large increase. Total Consumption Impact: Intermediate increase.

How does news of a future income loss affect consumption?

Consumption Smoothers: Large decrease. Hand-to-Mouth Consumers: No change. Total Consumption Impact: Intermediate decrease.

What factors shift consumption?

Changes in interest rates, future income expectations, taxes, and wealth.

What is the difference between movement along the consumption function vs. shifting the function?

Movement along: Caused by income changes. Shift of function: Caused by interest rates, expectations, taxes, and wealth.