CIMA BA1 Syllabus A. Macroeconomic And Institutional Context Of Business - Aggregate Demand - Notes ^{4 / 17}

Aggregate Demand (AD) is made up of

1. Consumer Spending (C) - (See below)

2. Injections:
    
   - Government spending (G)
   - Investments (I)
   - Exports (E)

3. LESS: 

   Imports (M)

Remember!

• AD = C + G + I + E - M

Consumer Spending

Households (people) purchase goods and services using income from e.g. employment or rent of land or profits from running companies.

The amount households plan to spend is called Consumer spending

It has 2 elements:

1. Income induced

   = we spend more as income rises

   Marginal propensity to consume (MPC) is a measure of the proportion of extra income that is spent on consumer goods.

2. Autonomous consumption (a)

   - Is not dependent upon the current level of income
   - We will always spend it, doesn't matter what

Formula for Consumer Spending

C = a + bY

• Where:
  a = autonomous consumption
  b = the marginal propensity to consume 
  Y = national Income

Example

Autonomous consumer spending = $300
Marginal propensity to consume = 0.3
National Income = $1,000

Required:

Calculate the Consumer Spending

• Solution

  C = a + bY 
  C = $300 + 0.3 x $1,000
  C = $600