Consumption Expenditure expenditure done by
households on final goods and services
Consumption is the largest component of AD
Consumption spending is relatively stable
3 Components of Consumption Spending
Nondurable Goods Services
Goods that last a long time
Goods that are consumed very
quickly Work performed for others
As we earn higher levels
of income (Yd) our
We consume all
of our income
Yd = C
Yd > C
than we spend
C > Yd
than we earn
Consumption increases at every
Consumption decreases at
Wealth includes those things you own such as your property
holdings, stock portfolio, or any other asset that has value.
Wealth is NOT your income
An increase in wealth will increase your consumption
A decrease in wealth will decrease your consumption
Expectations deal with expected future changes in income.
If you expect your future income to increase you may increase your spending today
If you expect your future income to decrease you may decrease your spending
I get a job with
begins in three
months. The job
pays more than I
now get. I will
Debt deals with how much you owe.
If you have a large amount of debt you may decrease your spending
If you have little or no debt you may increase your spending
Real Interest Rate
The real interest rate deals with the interest you pay on purchases that have been
financed – such as buying a large TV at Best Buy.
If the real interest rate fall your consumption may increase
If the real interest rate increases your consumption expenditures may fall.
Taxes deals with the taxes you pay on your income.
If the taxes you pay falls your consumption expenditures will increase
If the taxes you pay increases your consumption expenditures will decrease.