consumption

• consumption refers to spending by households on goods and services in an economy
• a factor that affects consumption is consumer confidence which refers to households' degree of optimism about the general state of the economy and stability of their income
• if there is higher consumer confidence, there will be higher levels of consumption
• High inflation reduces real wages and reduces consumer confidence meaning consumption will decrease
• higher income taxation will reduce consumption, higher interest rates will lead to less consumption
• if there is a larger population, there will be higher levels of consumption
• in the short term, higher availability of credit will cause higher consumption as people will have easier access to money. however, in the long run, this will cause a decrease in consumption as increased borrowing will cause more debt and repayment, meaning there will be less disposable income
• Marginal Propensity to consume (MPC) refers to the proportion of additional income that consumers spend rather than save. it is between 0 and 1 and a higher MPC means consumers are likely to spend more
• MPC = change in consumption/change in income
• lower-income people are likely to have a higher MPC compared to higher-income people, as poorer people devote a larger proportion to their needs and wants and don't have the capacity to save
• consumer confiedence is measured using the GfK which uses a survey to quantify consumer confidence
• an increase in wealth can increase consumption, due to the wealth effect which is a psychological phenomenon. consumer confidence rises when the value of assets rises
• Governments can increase consumption by freezing bills as this will lead to an increase in disposable income by capping the costs of bills, therefore leading to less inflation.