Consumption as part of Aggregate Demand

What's the equation for aggregate demand?

Aggregate Demand (AD) =

? + ? + ? + (? - ?)

On your mini whiteboards……

What's the equation for aggregate demand?

Aggregate Demand (AD) =

C + I + G + (X-M)

Lesson Objectives:

1)You will all show understanding for what consumption entails.

2)You should be to identify what influences consumption.

3)You could choose consumption as an evaluative tool in relation to AD.

Consumption is …..Put these words in the correct order to define consumption.

time. on the of periodand a consumer spending

goods over services

L.O 1) You will all show understanding for what consumption entails.

Consumption is …..The spending on consumer goods and services over a period of time.

L.O 1) You will all show understanding for what consumption entails.

Consumption is SPENDING on …

GoodsServices

Durable goodsNon – durable

goods

L.O 1) You will all show understanding for what consumption entails.

Consumption is SPENDING on …

GoodsServices

Durable goodsNon – durable

goodsHaircutChocolate

barWashing powder CarT.V

L.O 1) You will all show understanding for what consumption entails.

The consumption function

There are a number of factors that determine how much a household consumes.

Consumption & these factors = the consumption function Most important factor – disposable income.

L.O. 2: You should be to identify what influences consumption.

Factors influencing

consumption

The consumption function

There are a number of factors that determine how much a household consumes.

L.O. 2: You should be to identify what influences consumption.

Factors influencing

consumptionIncome

Wealth- Physical (houses, cars,

furniture)- Monetary (cash, money in

bank, stocks, shares, pensions)

Inflation

Interest rates

Availability of creditExpectations

Composition of households

Disposable Income Most important factor – disposable income.

L.O.3: You could choose consumption as an evaluative tool in relation to AD.

Example:

Suzie earns £1000 a month in 2014, due to 2015 salary increases at her company she earns £1200 a month. Economic theory predicts that the consumption of her household will rise.

But – how much will it rise? This measurement is the Marginal propensity to consume (MPC).

Marginal Propensity to Consume

L.O. 3:You could choose consumption as an evaluative tool in relation to AD.

Example: Suzie earns £1000 a month in 2014, due to 2015 salary increases at her company she earns £1200 a month.

Marginal propensity to consume (MPC) = change in consumption

-------------------------------------

change in income

If the £200 rise in income leads to £150 rise in consumption:

MPC = 150 -------- = 0.75 200

For the economy as a whole the MPC is likely to be positive but less than 1.

Marginal Propensity to Consume

L.O.3: You could choose consumption as an evaluative tool in relation to AD.

Question 1: Bob earns £2000 a month in 2014, due to 2015 salary increases at his company he earns £2500 a month.

Question 2Harry earns £550 a month, he has a salary increase of £100.

Question 3Penny and Ken have a combined income of £3000 a month, Ken has a pay increase of £400 a month.

Question 4Hardeep earns 10% more a month on an average income from his market stall of £1500.

£100 not spent in all cases.

Average Propensity to Consume

APC measures the average amount spent on consumption out of total income.

Example: if total disposable income (y) in an economy were £100 billion and consumption (c) were £90 billion then APC would be –

90---- = 0.9 100

In a developed economy APC is likely to be less than 1 because consumers will also save part of their earnings.

To summarise – consumption so far…

On your post it note write …

1)Define consumption2)The factors that influence it3)MPC4)APC

Try to complete without looking at notes….