2.2.2: Consumption

• Disposable income: Amount of money consumers have left to spend after taxes and benefits
• Marginal Propensity to consume: Proportion of additional income spent on consumption
• Formula for Marginal Propensity to consume:

  Change in consumption / Change in income
• Savings: Money that is not spent out of income
• Marginal Propensity to save: Proportion of additional income that is saved
• Formula for Marginal Propensity to save

  Change in savings / Change in income
• Influences on consumer spending

  Interest rates: Higher interest rates increase reward for saving, so consumption decreases

  Consumer confidence: Higher confidence = higher spending

  Wealth Effect: People with greater wealth tend to consume more, and when houses are worth more people feel richer and spend more

  Distribution of income: Those on high incomes tend to save more, so if money shifts from the rich to the poor consumption may increase

  Tastes: There is strong materialistic drive in modern society encouraging people to have the newest and best resulting in higher spending