Consumption and Saving

Consumption: Spending to satisfy needs and wants.

People buying food

Happy Man Buying Car

Kim Kardashian and her mom were shopping in Paris and spent $100,000 on handbags at Hermes. Seven of them, including six Birkins and a super rare crocodile skin purse that cost about $30,000 on its own.

Factors affecting consumption 1. Very obvious – income – the higher the income the higher the consumption.

Income The money received for goods, services or labour, or from other sources, as rent or investments.

Do unemployed people have an income?

Both Tim and Jim live in California. Tim Y = $14,000 a year Jim Y = $380,000 a year Lives in a rented apartment with 4 others. Bus to work. Eats three meals a day, but is sick of frozen foods. Would like to taste more high quality meat and does not know what sushi tastes like. Would like to do a night course but cannot afford it. Has not been on a holiday in 4 years. Lives in his seven bedroom house in California. Also owns a holiday home in Lake Tahoe and an apartment in Seattle. Drives his Porche to work, uses his SUV for weekend trips. Enjoys visiting the best restaurants in LA. Usually goes on 2-3 foreign holidays a year. Most recently to Peru.

Both Tim and Jim get a pay increase of 10%. That brings their income up to….

Both Tim and Jim get a pay increase of 10%. That brings their income up to Tim: $15,400 Jim: $418,000

At low incomes, people will spend a high proportion of any additional income. When you have low income, you don’t have the luxury of being able to save. You need to spend everything you have on essentials.

However, as incomes rise, people can afford the luxury of saving a higher proportion of their income. Therefore, as income rise, spending increases at a lower rate than disposable income. People with high incomes have a lower average propensity to spend.

The Marginal Propensity to Consume. The Marginal Propensity to Consume is the % of extra income that will be spent. The Marginal Propensity to Save The Marginal Propensity to Save is the % of extra income which is saved.

So, in light of this: A tax cut for the wealthiest people has the impact of increasing their disposable income by $2bn. A NMW increase has the impact of increasing NMW earners’ disposable income by $2bn.

Apart from income, what else determines how much we consume? Wealth

Wealth versus Income Wealth is not the same as income. Wealth: A measure of the value of all of the assets owned by a person

Wealth Effect The wealth effect is the change in spending following a change in wealth. This change in wealth can be real or imagined. http://www.cucirca.eu/the-simpsons-season-6-episode-17-homer-vs-patty-and-selma/

What might affect the wealth effect? 1. Changing house prices. 2. Changing share values.

Apart from income, what else determines how much we consume? Inflation

Interest rates

Apart from income, what else determines how much we consume? Interest rates – low interest rates encourage C and discourage saving. particularly for bigger purchases or consumer durables.

Apart from income, what else determines how much we consume? The willingness banks have to lend. (The availability of credit)

Apart from income, what else determines how much we consume? Expectations….. Feel good factor

Positive Net Migration

Apart from income, what else determines how much we consume? Age profile of the households

JM Keynes British economist…what did he say about consumption?

Keynes`s views Income most important, moreso than wealth or interest rates. He also believed people with higher incomes had a lower MPC than those with lower incomes

Marginal Propensity to Consume versus the Marginal Propensity to Save

Would the following have an effect on the MPC or the MPS? A rising unemployment rate The 9-11 attacks The Bank of England reducing interest rates Cautious banks reluctant to issue credit cards

Falling house prices Rising index of share prices A new emerging, middle class A higher rate of VAT Inflation reaching 5.6% Good weather

Milton Friedman`s views He placed greater emphasis on wealth than Keynes had done

Franco Modigliani and Albert Ando People`s future expectations are important. Those who feel that they will have higher incomes in the future, don`t bother to save now.