The higher the price level, the fewer goods will be demanded in the economy
Income stays same less can be afforded
Eat component behaves slightly different
Price Level = inflation
real output = taking inflation into acc
wealth effect: If income stays the same and price level goes up, then less can be afforded
Rate of interest effect: Higher interest rates reduces spending and increases saving
International trade effect:Increase in price level makes ecports less competitive
Definition: Household spending on goods and services, also known as
Factors that affect Consumer Expenditure
Real disposable income
Rate of interest (
Population age structure
In looking at consumer demand for goods, we look ash two categories of goods, durable and non-durable goods.
Durable goods: here are goods that are used by the consumer over a period of time (usually more than one year), For example, Cars computers, mobile phones, bicycles.
Non-durable Goods: These are goods that are used p immediately or over a relatively short period of time.
Household spending on G
The largest component of AD
The main influence is
disposable income: more income, more spending.
however the important factor is that generally an increase. in income means an increase in consumption (Ad shifts to the rights)
Changes in income often occur doe to tao changes or NI contribution changes
Higher interest rates will also shift AD to the left as consumer spending falls.
Investment is also knows as the addition of capital stock to the economy. Investments carried out by firms. Firms have two types of investment
Replacement investment- this occurs when firms spend on capital in order to maintain the productivity of their existing capital
induced investment- this occurs when firms spend on capital to increase their output to respond to higher demand in the economy.
Factors effectio n Investment Expenditure
Change in real disposable income
Rate of interest
price of capital equipment
Investment is not to be confused with buying shares or putting momey into a bank
We tend to call this investments in ‘everyday’ English but it is in fact ‘saving’ as it is a leakage from the circular flow of income.
Mar 22, 2022
Definition: Spending by central and local government on goods and services
Factor's affecting it:
Lwbel of econpmics activities
War and other threads
Law and Order
Definition: The valure of exprots minus imports
Factors affection Net Exports:
Real disposable income abroad
Real disposable income at home
Domestic price level
Government restrictions on free trade
10 marker on market dfailiure
Def pos /neg externalities
gov policies to correct or solve the market failiure