5 Factors Influencing Consumption

Factors Influencing Consumption; In a macroeconomic models the consumption function tracks total aggregate consumption expenditures; for simplicity it is assumed to depend on a basic subset of the factors economists believe are important at the household level.

Analysis of consumption expenditure is important for understanding short-term (business cycle) fluctuations and for examining long-run issues such as the level of interest rates and the size of the capital stock (the amount of buildings, machinery, and other reproducible assets useful in producing goods and services).

Empirical studies confirmed many factors influencing consumption. The first and arguably the most important factor is the disposable income of the people. The main determinant of consumption is surely income, or more precisely disposable income. When disposable income goes up, people buy more goods; when it goes down, they buy fewer goods.

5 Factors Influencing Consumption

The following are the factors influencing consumption and that can however cause a shift in the consumption function:

  • Changes in income Distribution

If households have different MPC, aggregate consumption depends not on aggregate income but also on the distribution of this income among households. Changes in the distribution of income will cause a change in the aggregate level of consumption expenditure associated with any given level of national income.

  • Changes in the Terms of Credit

Many durable consumer goods are purchased on credit. If credit becomes more difficult or more costly to obtain, many households may postpone their planned credit-financed  There would then be a temporary reduction in current consumption expenditure until the necessary extra savings are accumulated. Monetary authority can by controlling the cost and availability of credit shifts the consumption function and thus affects aggregate demand.

  • Changes in Existing Stock of Durable Goods

It is now recognized that any period in which durables are difficult or impossible to purchase and monetary savings are accumulated, it is likely to be followed by a sudden outburst of expenditure on durables.

Therefore, this will shift upwards the consumption function.

  • Changes in Price Expectation

If households expect inflation to occur, they would be willing to purchase durable goods, which they would otherwise not have bought for another one or two years. In such circumstances, purchases made now yield savings over  purchases in the future.

  • Government Policy

Changes in government policies can also affect the relation between national income and disposable income; for example, by altering tax rates.

An increase in income tax rate will, for example, reduce the amount of disposable income that reaches the hands of the households out of any level of national income. This will therefore make the consumption function curve to shift downwards.

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