Depends on a variety of factors:
1) Current Income (positive relationship)
Income increases=C increases
2) Past and Expected future incomes (Milton Friedman's Permanent Income Hypothesis)
Modiglani's Life Cycle Hypothesis argues that consumption is related to expected lifetime earnings and is more influenced by age.
3) Prices
Price Level (PL) increases= C increases (no choice)
Expectations of a sudden rise in PL= large increase in C
4) Income distribution
Rich people have the choice of saving or consuming therefore if taxes (T) increase they increase their saving (S)
5) Social attitudes
You are what you spend
6) Cost and availability of credit
Interest rates increase= C decreases
Cost of borrowing goes up= purchasing prices increase=consumption decreases
Cost of servicing loans increase=decreased consumption
Lack of availability= decreased C
7) Wealth effect
When house prices increase or stock markets increase, consumer confidence goes up therefore consumption increases
Equity withdrawal
8) Saving
9) Consumer confidence (out of 100 how many happy)
Influenced by:
- unemployment
- house prices
- political situation
- overseas
- stock markets
Measured by: GfK
