hi everybody consumption is the total spending by households on goods and services in the economy for countries like the uk and the us consumption is a massively important part of aggregate demand in the uk for example it accounts around 66 percent of aggregate demand in the usa something similar to that remember what the equation is for aggregate demand aggregate demand is c plus i plus g plus x minus m we in this video are going to look at reasons why consumption can increase or decrease for reasons independent of the price level so nothing to do
with the price level other reasons so these are all factors that can then therefore shift aggregate demand right or left as a result of influencing c in the aggregate demand equation before we get started something to bear in mind is to use the phrase the marginal propensity to consume in your chains of analysis here so when you're writing long paragraphs as to how these factors can influence c using the marginal propensity to consume will make you look amazing and more professional in your writing the marginal propensity to consume is just the willingness of a household
to spend any extra income that they earn right so it's something that you can use throughout i'll be using it use it as i do basically but also make sure you mention the multiplier effect anytime that a d is shifting for any of these factors let's say you can always bring in the multiplier effect to bolster your analysis i watched my video on the multiplier effect to understand it and then to know how to use it in your analysis so what factors can affect consumption independent of the price level well the level of real disposable
income where real means adjusted for inflation and disposable income is income left after taxes and national insurance have been paid so one reason why disposable income can increase is maybe if income taxes have been cut in the economy so it cuts in the marginal rate of income tax or increases in the tax-free allowance which is the level of income you're allowed to earn before taxes are paid before income tax is paid so if you increase the tax-free allowance or if you cut the marginal rate of income tax um that is going to increase the level
of real disposable income which will therefore increase the marginal propensity to consume and therefore increase the level of consumption in the economy if interest rates are cut for example then the cost of borrowing falls and the rate of return on saving falls if the cost of borrowing falls then that increases the incentive for consumers to go and borrow money because it's cheaper to do so now and to spend that money on expensive items like cars like houses like furniture like jewelry for example and that will increase consumption in the economy if interest rates are cut
the rate of return on saving decreases so that reduces incentive to save and instead any income that's generated might go into consumption as a result and that increases c a lot of the uk households will have mortgages right the way in which they can finance buying a house and monthly mortgages have to be repaid back so there are monthly repayments on mortgages and a lot of mortgages in this country are variable rate mortgages or tracker rate mortgages where the level of repayments or the interest repayments attract to the base rate in the economy to the
central bank interest rate so if interest rates are cut it means monthly repayments could fall for households who have variable rate mortgages or track rate mortgages which means monthly they have more disposable income to be able to spend in the economy increasing c in that way you also must bear in mind the availability of credit if the availability of credit is low then this can reduce the impact of borrowing this can reduce the impact of lower interest rates because simply banks are not willing to lend if the availability of credit is very very low so
that's something that can stop this happening it's something else which will affect c in the aggregate demand equation consumer confidence if there is high consumer confidence consumers going to have a higher marginal propensity to consume what can affect consumer confidence well it's job prospects and the level of unemployment in the economy so don't be vague in your writing and say oh you know expectations about the state of the economy that is true but then be more specific what you mean by that link very much to job prospects and the level of unemployment so if people
expect that they're going to get promoted soon or that their job prospects are very very strong they're going to be more likely to spend money their mpc is going to be higher if the level of unemployment is very low then individuals will feel very bullish in their job they felt they'll feel very confident in their job prospects and therefore more likely to spend money and not find a reason to save necessarily that period of time asset prices now this is very important asset price is linked to wealth how wealthy people feel the wealthier people feel
the more likely they are to spend money the higher the marginal the higher the marginal propensity to consume so what do we mean by asset prices well things like house prices share prices are very good example bond prices if these are going up and individuals hold such assets they feel wealthier they're more likely to spend money in countries like the uk there is a very strong correlation between asset prices like house prices and share prices and the level of consumer spending in the economy so that links to wealth and wealth links to consumer spending how
wealthy people feel in this case their income hasn't actually changed but they just feel like they are more rich hence why they are more willing to spend their money and also the level of household indebtedness if there is a huge amount of household indebtedness in the economy families living in huge debts then individuals are more likely to save that money as opposed to spending their money just in case things go bad and they need to repay those debts quickly they'd rather save that money to have a pool of money in the bank to then pay
off debts in case things go bad i either lose their job or something like that takes place or interest rates rise so the greater amount of household indebtedness the greater amount of saving and therefore less consumption taking place in the economy so these are all the main factors that can affect consumption there are other factors too like the age structure of the population like whether you can also argue as well which can affect consumption but these are the main ones the key thing for you is to be able to develop a chain of analysis linking
to consumption increasing or decreasing and therefore aggregate demand increasing or decreasing using such phrases thank you so much for watching guys stay tuned for the next video where we're going to look at savings the determinant of saving
