What people buy and where they spend their money provide valuable information about the economy. Consumer spending is the biggest component of our gross domestic product, making it a key metric to follow.
“Dropping shopping” it is the article which presents Britain’s consumer slump and the signs of its recover. The article analysing typical household’s accounts, provides information about a number of factors which, are likely to have restrained household spending growth. The factors include weak income growth, tight credit conditions, concerns about debt levels and the number and structure of employments also fiscal consolidation.
It is very important measure to check the health of economy. Real consumer spending fell by around 6% during 2008/2009 recession and it has been broadly flat since the end of 2009. Many households are uncertain about their future incomes which affect spending and saving decisions and when the consumer spending is declining it means that the economy is not performing very well. Based on article “Dropping Shopping” I will try identifies the most basic economic laws namely: supply and demand. Indeed, almost every economic event or phenomenon is the product of the interaction of these laws. The law of supply and demand explains why people behave in certain ways within a market economy, and can even be used to predict behavior and economic outcomes. The main point in this article touch problem with Income elasticity of demand. 2. FACTORS AFFECTING SPENDING AND SAVING DECISIONS Spending by households accounts takes around two third of all expenditure in the UK economy, so movement in consumption have an important impact on GDP. Article shows prospect of rising prices for goods that consumer cannot give up or substitute, like electricity are gas. The demand for products like gas or electricity is very inelastic. The real income has been highly squeezed. What is worse highly unlikely other prices will stand still. Another threat is continued depreciation in pound value, which provides to decrease in buying power because import becomes more expensive.
The consumers are more sensitive to price change when the goods or service takes a larger proportion of their income. This is because consumers think more carefully about spending money which, affect elasticity. The longer consumers adjust, the more sensitive they are to a price change, and the more elastic the demand curve. In that cases consumer turns to purchases substitute and inferior goods.
Tight credit conditions for borrowers were likely to reflect two conditions: a reduction in credit supply by bank and the cost of borrowing being too high for them. The most common response among households that are concern about their debts is to cut spending. Other respond to concerns about their debt level is working longer hours, getting better or better-paid job. According to this article situation is about to change, there are early signs of broad easing, because banks pass spike in their own borrowing costs the savings were start passing on. Homeowners with decent deposit are able refinance mortgages at 1.75% from 3.4%, saving 1.65% per year on interest payments. Easier and cheaper borrowings should release free up some cash. Change in credit condition should change elasticity demand for credit. For sure affected by tight credit condition are the young. Young households living in rental accommodation that according to the article can take up to 60% pre-tax income in London. Lower mortgage rates will most likely provide to competition in landlords market, keeps the rental rates in flat lower level. The author mention as well high rate of