Consumption and saving
- Created by: Itwasntme193
- Created on: 20-01-21 18:13
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- Consumption and saving
- Consumption and income
- The consumption function is the relationship between consumption and the factors that determine how much households consume.
- disposable income is the most inmportant determinant of consumption.
- the amount that consumption will rise can be meausred by the MPC.
- for the economy as a whole, MPC is likely to be +ve but less than 1. an increase in Y is likely to cause an increase in saving too.
- for individuals, MPC is can be more than 1 if money was borrowed to finance spending higher than income.
- the amount that consumption will rise can be meausred by the MPC.
- disposable income is the most inmportant determinant of consumption.
- APC measures the amount spent on consumption out of total income.
- in industrialised economies, APC is likely to be less than 1 because consumers save part of their earnings.
- Keynesian theory is the idea that income is the most important determinant of consumption.
- Keynesians suggest that as income rises, households prefer to save more so APC declines. Richer households also save more than poorer households.
- The consumption function is the relationship between consumption and the factors that determine how much households consume.
- Other determinants of consumption
- Interest rates- a lot of the money spent on durable goods comes from credit finance. An increase in the rate of interest increases the cost of payments. Households will then reduce their demand for durables which cuts their consumption.
- These interest rates also effect the cost of mortgage repayments which cuts spending on other items as well as possibly discourage consumers from borrowing money.
- consumer confidence- if consumers expect their situation to be the same or better in the future, they will maintain or increase their spending
- in a recession consumer confidence deteriorates.
- Wealth effects- physical wealth is made up of items such as houses. Monetary wealth is items such as cash in the bank and stocks.
- if wealth increases, consumption increases. this is the wealth effect. 2 important ways wealth can change over a short period of time.
- if house prices change for the better, households feel able to increase their spending, usually through borrowing more money
- a change in the calue of stocks and shares
- if wealth increases, consumption increases. this is the wealth effect. 2 important ways wealth can change over a short period of time.
- the availability of credit- governments may impose restrictions which causes a fall in consumption.
- inflation- if households expect prices to rise they might bring forward their purchases. However, households may save more to restore the real value of their wealth.
- the composition of households- young people spend more old people save more.
- Interest rates- a lot of the money spent on durable goods comes from credit finance. An increase in the rate of interest increases the cost of payments. Households will then reduce their demand for durables which cuts their consumption.
- the determinants of saving
- same as those that affect consumption. the savings function links income, wealth, inflation, interest rates etc with the level of saving.
- APS is usually 0.05 to 0.2 in western european countries. This means income is less important in deciding saving
- MPS is also unstable
- APS is usually 0.05 to 0.2 in western european countries. This means income is less important in deciding saving
- same as those that affect consumption. the savings function links income, wealth, inflation, interest rates etc with the level of saving.
- Consumption and income
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