The Relationship Between Income & Expenditure | avesisland.info
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The Relationship Between Income & Expenditure
The increase in consumer expenditures is not a direct relationship to income. For every extra dollar earned, there may be a fraction spent on disposable income.
Low-income areas may actually see more in expenditures than in actual income at different times. The difference between income and consumption is how much is spent and left over as savings at the end of the month. There are many factors that determine why consumers choose to spend more on goods not required for day-to-day living expenses.
These include stock market trends, tax laws, and even consumer optimism. Economic experts look at historical data to predict future trends based on new market conditions. The Effect of Consumer Confidence Consumers won't spend money unless they are confident in their personal economic situation and strength. This means consumers feel good about having and keeping a job with the potential of promotion.
Pay increases, stock portfolio rises and tax cuts can put more money in each person's pocket.
Consumption and Saving
As these conditions merge, consumer confidence increases. Consumer confidence is the trust a buyer has that he can afford a purchase either today or in the near future. For example, consumer confidence is shown by homebuyer trends.
This is a major purchase that takes decades to pay off. A buyer must feel good about the economy, as well as feeling secure about his personal financial situation to take on such a major purchase. Establishing Business Inventory Practices Another factor that affects consumer confidence in inventory. Supply and demand have a strong effect on whether buyers feel there is a need to purchase now. More specifically, we frequently assume that consumption is related to disposable income through the following relationship: A consumption function of this form implies that individuals divide additional income between consumption and saving.
We assume autonomous consumption is positive. Households consume something even if their income is zero. If a household has accumulated a lot of wealth in the past or if a household expects its future income to be larger, autonomous consumption will be larger.
It captures both the past and the future.
- Relationship between Disposable Income and Consumption
We assume that the marginal propensity to consume is positive. The marginal propensity to consume captures the present; it tells us how changes in current income lead to changes in current consumption. Consumption increases as current income increases, and the larger the marginal propensity to consume, the more sensitive current spending is to current disposable income.
The smaller the marginal propensity to consume, the stronger is the consumption-smoothing effect. We also assume that the marginal propensity to consume is less than one.