consumption as part of aggregate demand
TRANSCRIPT
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What's the equation for aggregate demand?
Aggregate Demand (AD) =
? + ? + ? + (? - ?)
On your mini whiteboards……
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What's the equation for aggregate demand?
Aggregate Demand (AD) =
C + I + G + (X-M)
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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.
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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.
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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.
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Consumption is SPENDING on …
GoodsServices
Durable goodsNon – durable
goods
L.O 1) You will all show understanding for what consumption entails.
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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.
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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
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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
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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).
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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.
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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.
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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.
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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….