Consumption as part of AD

1. What's the equation for
aggregate demand?
Aggregate Demand (AD) =
? + ? + ? + (? - ?)
On your mini whiteboards……

2. What's the equation for
aggregate demand?
Aggregate Demand (AD) =
C + I + G + (X-M)

4. 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.

5. Consumption is …..
Put these words in the correct order to
define consumption.
time. on the of period
and a consumer spending
goods over services
L.O 1) You will all show understanding for what consumption entails.

6. 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.

7. Consumption is SPENDING on
…
Goods
Services
Durable goods
Non – durable
goods
L.O 1) You will all show understanding for what consumption entails.

8. Consumption is SPENDING on
…
Goods
Services
Durable goods
Non – durable
goods
HaircutChocolate
bar
Washing
powder
Car
T.V
L.O 1) You will all show understanding for what consumption entails.

9. 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

10. 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
consumption
Income
Wealth
- Physical (houses, cars, furniture)
- Monetary (cash, money in bank,
stocks, shares, pensions)
Inflation
Interest rates
Availability of creditExpectations
Composition of households

11. 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).

12. 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.

13. 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 2
Harry earns £550 a month, he has a salary increase of £100.
Question 3
Penny and Ken have a combined income of £3000 a month, Ken has a pay increase of £400 a month.
Question 4
Hardeep earns 10% more a month on an average income from his market stall of £1500.
£100 not spent in all cases.

14. 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.

15. To summarise – consumption so far…
On your post it note write …
1) Define consumption
2) The factors that influence it
3) MPC
4) APC
Try to complete without looking at notes….