How Does Consumer Confidence Affect Aggregate Demand?
Economic experts say consumer confidence makes up approximately two-thirds of the aggregate demand based on income levels or changes, buying and spending trends, and economic conditions. A family’s disposable income can increase or decrease aggregate demand. Disposable income is considered what a family has left after normal cost of living expenses are paid.
When an economy falls and job losses or decreases in salaries occur, families have less disposable income. Depending where a family falls in income loss is also important. Even in economic downturns those on the higher end of the wage scale habitually spend less of their disposable income. Those on the lower end will spend the same or more of their disposable income when the economy is down.
Consumer trust is often the largest factor in a down economy. Households look for lower prices and discounts and may wave a favorite brand for a cheaper brand. Because most families don’t include economic experts, that trust factor plays a huge role when families consider stock market drops, the possibility they will lose their job, and if they will have enough money to pay their mortgage and other living expenses.
In good economic times aggregate demand goes up based on consumer spending. Supply and demand is high because of increases in spending habits. On the other end of that scale, when the economy is bad and demand is lowered, suppliers may charge higher prices for a product that was cheaper in good economic times.
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