2.2.2 Consumption

• Disposable Income

  Disposable income is the income left over for an individual or household after taxes have been paid.
• Relationship Between Disposable Income and Consumer Spending


  Generally, as disposable income increases, consumer spending tends to rise.

  
  

  This relationship is explained by the marginal propensity to consume (MPC), which is the proportion of an additional dollar of income that a consumer spends.
• Understanding the Relationship Between Savings and Consumption

  Savings are the portion of income that is not spent on consumption - inverse relationship between saving and consumption

  
  

  When consumers save more (increase savings), they spend less on consumption

  
  

  When consumers save less (decrease savings), they spend more on consumption
• Influences on Consumer Spending (1)

  Interest Rates:

  
  

  Lower interest rates tend to stimulate consumer spending because borrowing costs are reduced.
• Influences on Consumer Spending (2)

  -Consumer confidence:

  The stronger the economy, the higher consumer confidence

  
  

  Consumers feel secure in their jobs and are confident of receiving regular salary payments

  Consumption increases and saving decreases

  
  

  In a weakening or recessionary economy, consumer confidence falls

  
  

  Consumers feel less secure in their jobs

  Consumption decreases and saving increases
• Influences on Consumer Spending (3)

  -Wealth effects:

  If consumer wealth increases, then consumption usually increases

  
  

  Rising property prices or share prices give consumers confidence to borrow more money

  
  

  Increased borrowing = increased consumption