2.2.2 Consumption

CONSUMPTION

• consumer spending on g and s over a period of time

DISPOSABLE INCOME (Y)

• money consumers have left to spend, after taxes have been taken away and any state benefits have been added

• Y affected by gov taxation and wages

• most important factor in determining the level of consumption

MARGINAL PROPENSITY TO CONSUME (MPC)

• MPC- how much a consumer changes spending following a change in income

• for most, MPC will be pos but less than 1 i.e. increase in income increases spending but not by as much

• some will have an MPC of more than 1 as they use borrowing or savings to fulfil demand for goods

• lower income people tend to have a higher MPC as they’re likely to spend more of their increase in income

• MPC= change in consumption/change in income

AVERAGE PROPENSITY TO CONSUME (APC)

• average amount spent on consumption out of total income

• in industrialised country, APC for economy is likely to be <1 as people save some of their earnings

• APC= total consumption/total income

RELATIONSHIP BETWEEN SAVING AND CONSUMING

• savings- what is not spent out of income

• increase in consumption decreases savings

• same factors which affect consumption affect savings- but in the opposite way

MARGINAL PROPENSITY TO SAVE (MPS)

• how much of an increase in income is saved

• MPS= change in savings/change in income

AVERAGE PROPENSITY TO SAVE (APS)

• average amount of income saved

• APS= total savings/total income

OTHER INFLUENCES ON CONSUMER SPENDING

• interest rates

• consumer confidence

• wealth effects

• distribution of income

• tastes and attitudes

INTEREST RATES

• most major expenditures bought on credit so interest rate will affect cost of good for consumers

• high interest rates= high price of good= reduces consumption

• high interest rates= increases mortgage repayments= reduces consumption

• rise in interest rates= decreases value of shares= people experience a negative wealth effect

CONSUMER CONFIDENCE

• major factor that affects people's spending is future expectations

• if people are confident about the future and expect pay rises- consumption will increase

• if high levels of inflation expected- will buy now as it will be at a cheaper price- consumption will increase

• if recession expected and fear possible unemployment- consumption will decrease- people save more

• if taxes that increase prices expected, they will buy now + opposite

• if interest rates falling expected, they may delay purchases as things on credit will be cheaper + opposite

WEALTH EFFECTS

• wealth-stock of assets

• wealth effect: change in consumption following change in wealth

• wealth effect experienced when real house prices rise as owners feel more confident with spending as they know that if they go into financial difficulty they could borrow more against the house, since its worth more than their current mortgage

• can also be experienced when share prices rise as people may sell some of their shares and spend the money or be more confident in spending as they know they have the shares to fall back on in case of financial difficulty

• greater wealth= greater confidence= greater consumption

DISTRIBUTION OF INCOME

• those on high incomes tend to save a higher % of income than those on low incomes

• so a change in the distribution of money in the economy will affect the level of consumption

• if money is moved from the rich to the poor, consumption is likely to increase as the poor have a higher MPC

TASTES AND ATTITUDES

• in society, there’s a strong materialistic drive that encourages people to have the newest

• so spending can be very high, in some cases even above income

• if people were less materialistic, consumption would decrease