Aggregate Demand

Aggregate Demand is the total planned real expenditure on the goods and services produced within a country 

AD = C+I+G+(X-M)

What effects consumers decision to spend?

• inflation - high inflation may encourage more spending in the short run as money is losing real value 
• economic growth - more growth, more income, more spending (also more saving as consumers can now afford to)
• future expectations - if incomes are expected to fall in the future (eg increasing income tax), consumers may save now in preparation 
• seasonality - eg more spending at Xmas
• houseprices - a measure of wealth - if house prices increase, consumer wealth increases so leads to more spending 
• confidence - reduced confidence reduces spending 
• unemployment - increased unemployment reduces disposable income, so less consumption 

Consumption - is spending on consumer goods and services. Sources of consumer income include wages, savings, return on investments, benefits and pensions. Consumption is the largest component of AD - in 2012, C was £927 bn out of AD of £1504 bn. 

Marginal Propensity to Consume (MPC) - the change in consumer spending following a change in income. Calculated by change in consumption / change in income. The remainder is the marginal propensity to…