Consumption

• What is Disposable income?

  Income after taxes and other deductions
• Marginal propensity to consume (MPC)


  The proportion of additional income that is spent on consumption
• Average propensity to consume (APC)

  The ratio of total consumption to total income
• What happens as disposable income increases?

  MPC falls
• Increase in income for the rich


  Small impact on consumption compared to increase for the poor
• Justification for cutting taxes for the rich

  Will not impact consumption as much as cutting taxes for the poor
• Household savings ratio


  Calculates household savings as a proportion of household income
• When the economy is booming(Household ratio)

  Household savings ratio increases
• When the economy is in recession(Household ratio)

  Household savings ratio decreases
• Factors influencing consumption


  • Interest rates
  • Monetary policy
  • Consumer confidence
  • Wealth effects
• As interest rates increase


  People are more willing to save rather than spend (APC & MPC fall)
• Influence of monetary policy

  Has a large impact on increasing consumption levels
• During an economic boom(Consumption)

  Consumption increases and savings decreases
• During an economic recession(Consumption)

  Consumption decreases and savings increases
• When there is uncertainty about prices and incomes(Consumption)

  Consumption decreases and savings increases
• Wealth effects


  Changes in the real value of assets that store wealth affect consumption
• Wealth effect impact

  • If price levels fall, the real value of wealth increases