Consumption 2.2.2 (unit 24)

Question 1

What is consumption?

Answer 1

In economics it is spending on consumer goods and services over a period of time.

Question 2

What are durable goods?

Answer 2

They are goods which although are bought at one period of time but continue to provide a stream of services over a long period of time.

Question 3

What are non-durable goods?

Answer 3

They are goods that are used up immediately or over a short period of time.

Question 4

What is saving?

Answer 4

It is what is not spent out of an income.

Question 5

What is disposable income?

Answer 5

Disposable income is your income minus pension contributions, rent and direct taxes.

Question 6

What is the consumption function?

Answer 6

It is the relationship between the consumption of households and the factors which determine it.

Question 7

What is the equation for ‘marginal propensity to consume’?

Answer 7

Change in consumption
MPC= ———————————–
change in income

Question 8

What is the equation for the ‘average propensity to consume’?

Answer 8

Consumption
MPC= ——————–
Income

Question 9

What are some of the other determinants of consumption?

Answer 9

• Interest rates, the higher interest the the consumption of durable goods will fall
• Consumer confidence, if consumer confidence is high people will be more likely to invest in durable goods and non-essential items.
• Wealth effects, a change in consumption following a change in wealth.
• Availability of credit, can often be used to reduce positive output gaps by governments.
• Inflation, if inflation rises faster than wages than goods will be more expensive so obviously consumption will fall.
• Composition of households, if there are more younger and older people consumption will rise as opposed to middle aged people.
• How likely people are to save money.