Consumption

1
Consumption

• the amount households spend on goods services
• disposable income is the income left over after
  direct taxation plus state benefits
• The tendency to spend an extra 1 earned is
  called the marginal propensity to consume (MPC)
  if we spend 0.70 of each 1 we earn, MPC is
  0.7 (the rest is saved
• MAKES UP between ½ 2/3 OF AD!!!

2
Influences on Consumption
Real Incomes
Cost Availability of Credit
Wealth
Influences on Consumption
Confidence
Direct Taxes
Savings
3
Saving

• the disposable income which is not spent
• as income rises, both the actual amount saved and
  the marginal propensity to save tend to
  increase
• eg. a person with a disposable income of
  1000/month may save 100 (10) whereas a person
  with disposable income of 4000/month may save
  1000 (35)

4
Influences on Saving
Real Incomes
Interest Rates
Govt Policies
Influences on Saving
Culture Attitudes
Range of Opportunities
5
A little something extra to think aboutThe
Paradox of Thrift

• According to Keynes, although saving is required
  for long term growth (investment), planned saving
  can in fact lead to a decrease in investment. The
  immediate effect of an increased desire to save
  is a fall in consumption. This reduces the
  incomes of producers. This could lead to a fall
  in national income, decreasing the amount
  available to save thus invest.