Consumption – AS/A LEVELS/IB/IAL
Consumption – AS/A LEVELS/IB/IAL
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Consumption
Consumption records how much consumers spend. It’s also the largest component (60%) of the aggregate demand curve.
AD = C + I + G + (X – M)
C = Consumption
I = Investment
G = Government Spending
X = Exports
M = Imports
What impacts Consumpion?
Interest rates
An increase or decrease in interest rates can help to manipulate consumption in the UK economy.
Lower Interest Rates
A decrease in interest rates will make the cost of borrowing cheaper for consumers. This will provide them with an incentive to borrow and spend rather than save. This is because saving money when interests are low means the return you will get is lower.
Lower interest rates will also make it more attractive for businesses to borrow and invest into the UK economy. This will also have a positive multiplier effect through increases in consumption.
Higher Interest Rates
High interest rates will cause a decrease in consumption. Higher rates will encourage consumers to save as they will gain higher returns on their deposits causing a decrease in consumption. Higher rates will also discourage businesses to invest due to higher interest repayments.
Taxes
A decrease or increase in taxes will impact consumer disposable income. An increase in income tax would reduce consumption as consumers would be left with less disposable income after tax.
Consumer confidence
When consumers feel more confident about the state of the economy e.g. boom period in the business cycle. They are more likely to spend money as their pay is likely to increase and employment levels are also likely to be higher. (Vice versa)
State of the economy
If a country isn’t in a good economic position due to high levels of corruption or civil war. This could negatively impact consumer confidence and lead to lower consumption in this country.
Income
The more disposable income consumers earn. The more they will consume.
Wealth effects
The wealthier a consumer feels the more they are likely to spend. Wealth is normally determined by assets or income an individual earns or holds. An increase in the price or value of assets such as a house or shares can cause a large increase in consumption. A positive wealth effect causes an increase in consumer confidence and spending.
Quick Fire Quiz – Knowledge Check
1. Identify and explain six factors affecting Consumption (12 marks)
2. Explain how a change in interest rates affect the level of Consumption (6 marks)
Next Revision Topics:
A Level Economics Past Papers
