• 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.

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.

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

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

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?

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.