2.2.1 the characteristics of AD
Total amount of goods and services purchased in an economy over a period of time; C + I +
G + (X-M)
2.2.2 consumption (marginal propensity to consume)
spending by households on goods and services
spending on real output, non-durables, durables & services (60% of AD)
durable goods = consumed over a long period of time,
- consumption = largest component of AD thus significant impact
factors affecting consumption
National income/Disposable incomes:
- higher incomes incentivise consumers to spend = increased consumption (but at a
slower rate as people tend to save more as earnings rise)
Positive wealth effects:
- change in consumption following a change in wealth
- increased value of assets (property, shares etc.) = positive wealth effect = incentive
for increased consumer spending
- increased consumer confidence; consumers are less likely to save
Consumer confidence:
- bull market: high confidence -> increased consumer spending as they will make more
purchases that they know they can pay for in the future (opp. for bear market)
Job security:
- low unemployment = less uncertainty about economy = workers less worried they
may lose their job = increased spending
Interest rates:
- high IR = high cost of borrowing = fall in consumption for normal goods
Demography:
- growing population (e,g immigration) = increased spending
- rising aggregate demand BUT inflationary pressure
- faster short run economic growth BUT long run unbalanced growth
- less spare capacity BUT negative environmental effects (fast fashion)
- falling unemployment BUT more household debt (from borrowing)
- increased businesses confidence to invest = increased innovation BUT greater
current account deficit due to greater imports
- fall in house prices = fall in demand -> negative wealth effect / reduction in consumer
confidence
Factors affecting consumer confidence
- Falling unemployment
- Rising incomes
- Economic growth = more predictable job security
- Lower inflation rates
Factors affecting savings
- income
- fall income -> reduced savings -> fall in MPS
Total amount of goods and services purchased in an economy over a period of time; C + I +
G + (X-M)
2.2.2 consumption (marginal propensity to consume)
spending by households on goods and services
spending on real output, non-durables, durables & services (60% of AD)
durable goods = consumed over a long period of time,
- consumption = largest component of AD thus significant impact
factors affecting consumption
National income/Disposable incomes:
- higher incomes incentivise consumers to spend = increased consumption (but at a
slower rate as people tend to save more as earnings rise)
Positive wealth effects:
- change in consumption following a change in wealth
- increased value of assets (property, shares etc.) = positive wealth effect = incentive
for increased consumer spending
- increased consumer confidence; consumers are less likely to save
Consumer confidence:
- bull market: high confidence -> increased consumer spending as they will make more
purchases that they know they can pay for in the future (opp. for bear market)
Job security:
- low unemployment = less uncertainty about economy = workers less worried they
may lose their job = increased spending
Interest rates:
- high IR = high cost of borrowing = fall in consumption for normal goods
Demography:
- growing population (e,g immigration) = increased spending
- rising aggregate demand BUT inflationary pressure
- faster short run economic growth BUT long run unbalanced growth
- less spare capacity BUT negative environmental effects (fast fashion)
- falling unemployment BUT more household debt (from borrowing)
- increased businesses confidence to invest = increased innovation BUT greater
current account deficit due to greater imports
- fall in house prices = fall in demand -> negative wealth effect / reduction in consumer
confidence
Factors affecting consumer confidence
- Falling unemployment
- Rising incomes
- Economic growth = more predictable job security
- Lower inflation rates
Factors affecting savings
- income
- fall income -> reduced savings -> fall in MPS
