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December 15, 2018 

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CONSUMER CONFIDENCE, AGGREGATE DEMAND DETERMINANT:

One of several specific aggregate demand determinants assumed constant when the aggregate demand curve is constructed, and which shifts the aggregate demand curve when it changes. An increase in consumer confidence causes an increase (rightward shift) of the aggregate demand curve. A decrease in consumer confidence causes a decrease (leftward shift) of the aggregate demand curve. Other notable aggregate demand determinants include interest rates, federal deficit, inflationary expectations, and the money supply.
Buyers' preferences are an important determinant of market demand.
  • If buyers find that they "like" a good more, then their demand increases.

  • If buyers find that they "like" a good less, then their demand decreases.
This relation between buyers' preferences and microeconomic markets can be extended to consumer confidence and the macroeconomic aggregate market.

Rather than focusing on preferences for a specific good, consumer confidence is the household sector's general perception of the economy. Is the economy healthy? Is it sickly? Is a contraction forthcoming? Will the current expansion continue?

The confidence that consumers have in the economy affects their willingness to undertake consumption expenditures.

  • If households have a high degree of confidence, then they are likely to increase consumption expenditures. Life is good. The time has come to buy a new house.

  • If households have a low degree of confidence, then they are likely to decrease consumption expenditures. Life is bad. The prudent action is to spend less and save for troubled times.
A change in the consumer confidence, by changing consumption expenditures, induces changes in aggregate demand. A boost in consumer confidence increases aggregate demand and a drop in consumer confidence decreases aggregate demand.

Shifting the Curve
Shifting the Curve

This graph displayed to the right is a common aggregate demand curve. Like all aggregate demand curves, this one is constructed based on several ceteris paribus aggregate demand determinants, such as consumer confidence. The key question is: What happens to the aggregate demand curve if consumer confidence changes?

More Confident

Suppose, for example, that the economy has been growing steadily for a couple of years. Real production is expanding. Unemployment is down. Inflation is low. Life is good. And, of some importance, the public trusts that the President, Congress, and the Federal Reserve System will NOT do anything disruptive. Perhaps the country has just won a war or achieved another major accomplishment like landing on the moon.

In this case, consumer confidence is bound to increase. The household sector is thus inclined to spend freely, especially on durable goods like cars, houses, furniture, and appliances. The result is that this increase in consumer confidence causes an increase in consumption expenditures and subsequently an increase aggregate demand.

To see how a boost in consumer confidence affects the aggregate demand curve, click the [More Confident] button. The increase in consumer confidence triggers an increase in aggregate demand, which is a rightward shift of the aggregate demand curve.

Less Confident

Alternatively, the household sector might begin to lose confidence in the economy if signs of trouble emerge. For example, the growth rate of real production might taper off. The unemployment rate might rise a bit. Perhaps the Chairman of the Federal Reserve System proclaims that the continued expansion is soon to end. Maybe Congress and the President have been negotiating a big tax increase. It might be that political scandal has besieged government.

In this case, consumer confidence is likely to decrease. The household sector is thus inclined to spend less freely, especially reducing expenditures on durable goods, such as cars, houses, furniture, and appliances. Rather than spending as much, they save a little more... just in case! The result of this decrease in consumer confidence is a decrease in consumption expenditures and subsequently a decrease aggregate demand.

To see how a decline in consumer confidence affects the aggregate demand curve, click the [Less Confident] button. The decrease in consumer confidence triggers a decrease in aggregate demand, which is a leftward shift of the aggregate demand curve.

What Does It Mean?

The importance of the consumer confidence as an aggregate demand determinant is fundamental to the business cycle. Household consumption expenditures are the largest of the four expenditure categories, comprising about two-thirds of aggregate expenditures on real production. While consumption is relatively stable compared to the extremely volatile investment, even small changes in this large expenditure category can trigger business-cycle instability. And small changes in consumption can result from changes in consumer confidence.

In fact, even though the household sector is composed of almost 300 million distinct individuals, each with their own likes and dislikes, their own hopes and dreams, they tend to respond to business-cycle conditions in a surprisingly uniform manner. During a recovery, people are optimistic that the worst is over and consumer confidence rises. This confidence helps propel the economy into a prosperous expansion.

However, after an expansion has been in place for several years, people eventually become nervous, wondering when the next contraction will begin. Such anxiety generates a decline in consumer confidence that is reinforced by ANY bad news. Of course, the decline in consumer confidence frequently plays in key role in the actual of the ensuing contraction.

Then during a contraction, consumer confidence is low and falling. People perceive only the bad news, doubting that life will every improve. Such low and falling consumer confidence then prolongs the contraction.

<= CONSUMER ADVISORY COUNCILCONSUMER CONFIDENCE, AGGREGATE EXPENDITURES DETERMINANT =>


Recommended Citation:

CONSUMER CONFIDENCE, AGGREGATE DEMAND DETERMINANT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: December 15, 2018].


Check Out These Related Terms...

     | aggregate demand determinants | interest rates, aggregate demand determinant | federal deficit, aggregate demand determinant | inflationary expectations, aggregate demand determinant | money supply, aggregate demand determinant | exchange rates, aggregate demand determinant | physical wealth, aggregate demand determinant | financial wealth, aggregate demand determinant | change in aggregate demand | change in aggregate expenditures | aggregate demand shifts | slope, aggregate demand curve | aggregate supply determinants |


Or For A Little Background...

     | aggregate demand | aggregate expenditures | aggregate demand and market demand | determinants | gross domestic product | consumption expenditures | investment expenditures | government purchases | net exports | price level | real production | GDP price deflator | real gross domestic product |


And For Further Study...

     | AS-AD analysis | aggregate market | business cycles | circular flow | Keynesian economics | monetary economics | aggregate market shocks | Consumer Confidence Index | Index of Consumer Sentiment | buyers' preferences, demand determinant |


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