Determinants of (Factors influencing) consumption
- Level of disposable Income. The higher the level of disposable income, the higher the level of consumption and the lower the level of disposable income, the lower the level of consumption.
- The level of savings. The higher the level of savings, the lower the level of consumption and the lower the level of savings, the higher the level of consumption.
- The level of wages. An increase in the wage rate leads to an increase in consumption and a reduction in the wage level leads to a fall in the level of consumption.
- Level of direct taxation. An increase in direct taxes reduces the disposable income of people and hence reduces consumption. But a reduction in direct taxes increases disposable income of people and increases consumption.
- Level of government expenditure. Increase in government expenditure for example on transfer payments leads to an increase in consumption and a reduction in government expenditure reduces consumption.
- Rate of interest on deposits. An increase in interest rate on bank deposits reduces consumption and a decrease in interest rates on deposits increases the level of consumption.
- Level of liquidity preference. The higher the level of liquidity preference, the lower the level of consumption and the lower the level of liquidity preference, the lower the level of consumption.
- Consumer’s expectations, An expected future increase in inflation by the consumer increases the current consumption of goods and services but an expected future price fall reduces the current consumption.
- Nature of income distribution. Consumption is low where there is high level of income inequalities. But with fair income distribution, consumption increases.
- Cost and availability of credit. Availability of credit facilities in form of hire purchases, cash discounts etc. Increase consumption and absence of such credit facilities reduce the level of consumption.
- Size of the population. An increase in population leads to increase in the level of consumption but a fall in population leads to a reduction in the level of consumption.
- Level of Inflation in the economy. An increase in the general price level reduces the real value of money hence a fall in consumption. But a decrease in the general price level increases the real value of money which leads to an increase in income
- Level of retained profits. The more profits the company retains in business the lower the level of consumption while the lower the amount of retained profits the higher the level of consumption
CATEGORIES Economics
TAGS Dr. Bbosa Science
