CONSUMER MARKET'
The consumer market is the market
where goods and services are bought and sold. This market allows
us to analyse how, in an economy, the level of balanced production
is determined in the short term.
In the short term, we suppose that the level
of balanced production is determined by demand: that's to say,
companies will produce what they have been asked to produce (this
is the hypothesis of one of the main schools of Economy, the Keynesiana
school).
The appointed demand (equivalent to GDP) is
defined in the following manner:
Y = Consumption +
Inevestment + Government Spending + XM (Exports/Imports)
We are now going to have a look at how the different
components behave:
1. Consumption
Consumption depends on different
factors, but its main dependence is with the level of
income:
If income increases consumption
increases and if income decreases consumption decreases. It's
logical, if people have more money to spend they consume more,
and if they have less to spend they consume less.
The Y axis: Consumer The X axis: Income
From this relationship, we can look at the role
of consumption which determines the volume of consumption
for every level of income available:
Consumption = Co
+ C1 Yd
Where:
"C"
is the total consumption
"Co"
is autonomous consumption, what people consume even when they
don't have an income: it is survival consumption (you need to
eat, you need clothes...) which is financed by savings or with
help from others.
"C1"
is the marginal propensity to consume and it measures the rate
at which consumption is changing when income is changing. The
MPC is actually the slope of the consumption function.
"C1" has a value between 0 and
1: when income increases, a part goes towards consumption
and another part goes towards savings.
"C1" will be equal to 0 if any
increase of income is assigned to savins and it will be 1
if the increase is assigned to consumption.
"Yd"
is the disposable income
2. Investment
Investment includes the purchase
of new elements to include in the productive structre
of companies (machinery, computers, cars, instalations...),
this can be called investment in stock.
Investment is related fundamentally to two variables:
Level of income.
If income increases investment increases (there is
more money available to finance new proejcts) and if income
decreases investment also decreases.
Interest Rate.
The relationship is the opposite: if interest rates
increase (it is more expensive to finance new projects, therefore
those projects that offer less profit are ruled out); that's
to say, the number of projects that aren't sufficiently attractive
to carry out will decrease. Iif the interest rates decrease
investment increases (it is cheaper to get into debt to underake
new proejcts).
A psychological factor can also influence, the companies
expectations, although it is difficult to quantify them.
The Y axis: Interest Rate The X axis: Investment
