Households split income between spending and saving. This page explains the consumption function, the marginal propensity to consume, wealth effects and confidence, and shows how to test them in an exam.
Why did people keep spending when confidence surveys said they were miserable?
Households split disposable income between spending and saving. The marginal propensity to consume (MPC) is the share of each extra pound that is spent. Income moves spending along the consumption function. Wealth, interest rates, credit and confidence shift it. Surveys record attitudes, so actual spending can differ when savings and credit allow it.
Consumption (C) is household spending on goods and services. Disposable income (Yd) is income after direct taxes and after benefits are added. The Office for National Statistics (ONS), the UK statistics agency, defines it as the money households have available to spend, save or invest.[5]
Households can only do two things with disposable income: spend it or save it. So the propensity to consume and the propensity to save always add up to one.
The marginal propensity to consume (MPC) is the fraction of an extra pound of disposable income that is spent. The average propensity to consume (APC) is total consumption divided by total disposable income.
Illustrative figures: disposable income rises by £2,000 and spending rises by £1,500. The MPC is 1,500 ÷ 2,000 = 0.75, so the MPS is 0.25.
The household saving ratio is the share of household resources that is not spent. It is a good headline measure, but it includes pension saving, so read it with care.
A change in disposable income moves households along the consumption function. A change in any other determinant shifts the whole line, because it changes how much is spent at every income level.
Evidence from US households finds the MPC is lower at higher wealth quintiles.[4] Households with little saving have to spend extra income, so the same pound moves spending more when it reaches them.
Figure 1 shows the consumption function and the saving function it implies. At the break-even point, spending equals disposable income, so saving is zero.
The GfK index, a monthly UK survey of consumer confidence, fell 11 points to -24 in October 2026. It was the sharpest monthly fall since April 2020.[3] A survey records how people feel. It does not record what they buy.
Spending can hold up when mood is poor, because three things offset it. Households may hold savings built up earlier. The saving ratio was 12.0% in the last quarter of 2024 as first published,[2] and 8.8% in the second quarter of 2026.[1] Falling from a high base means households have been drawing down their cushion. Credit and asset prices can also support spending.
What the outcome depends on:
A good judgement weighs these points. Confidence is a leading signal, not a certain cause.
When a question gives a calculation, show the working and then interpret the answer. A bare number earns only the AO1 and AO2 marks.
The economics is the same on every board; the question format is what changes. Most questions on this topic take one of six shapes. Open each to see how the topic appears in it and what earns the marks. All questions here are original Curriculum Circle practice questions, not board questions.
On this topicVery common. Expect definitions of MPC and MPS, items that ask which factor shifts the consumption function, and short calculations.
What earns the marksAO1 for the definition and AO2 for applying it to a short scenario.
CC practice questionWhich one of the following would shift the consumption function upward? A) a rise in income B) a rise in house prices C) a rise in direct tax D) a rise in the saving rate on savings accounts (1 mark)
On this topicCommon. You calculate the MPC, MPS or APC from a table, or find the change in consumption from a change in income.
What earns the marksAO1 for the formula and AO2 for the correct figure with a one-line interpretation.
CC practice questionIllustrative figures: disposable income rises from £1,200bn to £1,300bn and consumption rises from £1,000bn to £1,070bn. Calculate the MPC and the MPS. (3 marks)
On this topicCommon. You explain how one determinant, such as interest rates or wealth, changes consumption.
What earns the marksAO1 for the concept, AO2 for context and AO3 for a short chain of reasoning.
CC practice questionExplain how a rise in house prices might affect consumer spending. (6 marks)
On this topicCommon. You use a consumption or AD diagram, or data on saving and confidence, to analyse a change in spending.
What earns the marksAO2 for using the data and AO3 for a developed chain from the determinant to aggregate demand and output.
CC practice questionUsing a diagram and the data provided, analyse how a rise in the household saving ratio might affect real GDP. (9 marks)
On this topicVery common. An extract on confidence, saving or wealth is paired with a judgement on whether spending will rise or fall.
What earns the marksAO3 for analysis and AO4 for weighing what decides the outcome, such as savings, credit and income.
CC practice questionEvaluate the view that falling consumer confidence will reduce consumer spending in the UK. (12 marks)
On this topicCommon as part of a larger demand question. Consumption is often one of several arguments in an essay on aggregate demand or growth.
What earns the marksAO1 to AO3 for developed arguments and AO4 for a reasoned final judgement that decides the top band.
CC practice questionTo what extent is consumer confidence the main driver of household spending? (25 marks)
| Weight | What it is | What it means on consumer spending and saving | |
|---|---|---|---|
| AO1 | 20–23% | Knowledge and understanding of terms, concepts, theories and models | Define consumption, MPC, MPS, APC and the wealth effect, and state the formula. State which determinants shift the consumption function. |
| AO2 | 26–29% | Application to economic contexts | Use the figures in the data: saving ratios, confidence scores and income changes. Name the households affected and the time period. |
| AO3 | 26–29% | Analysis of issues and their impact on economic agents | Build chains such as higher house prices, then greater perceived wealth, then higher spending, then higher aggregate demand (AD), then higher output. Link the MPC to the size of the effect. |
| AO4 | 22–25% | Evaluation, using evidence to reach a judgement | Weigh the factors that decide the result: size and duration of the shock, savings buffers, credit conditions, who is affected and time lags. End with a supported judgement. |
Weightings are approximate and taken from the AQA A-level Economics 7136 specification [0]. Edexcel and IAL weight the objectives differently, but they test the same four skills.
Evaluate the view that a fall in consumer confidence will reduce UK consumer spending. (25 marks)
A fall in confidence raises fears about jobs and prices, so households save more as a precaution. A higher saving rate means a lower share of disposable income is spent, so the consumption function shifts down. Consumption is a large part of aggregate demand (AD), so AD falls, and real GDP and employment fall through the multiplier. Retailers of big-ticket items see this first, because households can delay those purchases.
The link is weaker than it looks. In October 2026 the GfK index fell 11 points to -24,[3] yet in the second quarter of 2026 the ONS reported that consumption still grew while confidence stayed subdued.[1] Savings, credit and income all feed spending, so the effect depends on them. If real incomes fall, or the fall in confidence lasts, spending is more likely to drop, and households with a high MPC will be hit first. If households hold savings and the shock is brief, spending may hold. Confidence is a useful early warning but not a cause on its own. A fall in confidence will reduce spending only when it comes with weak income or tight credit, so I judge the claim partly true.
In the second quarter of 2026, the ONS reported that the UK household saving ratio was 8.8%, above its pre-pandemic level. Household consumption in volume terms still grew by 0.3% while consumer confidence stayed subdued.[1]
GfK's UK consumer confidence index fell 11 points to -24 in October 2026. Reuters reported it as the sharpest monthly fall since April 2020, with the major purchase index at its lowest in over two years.[3]
A 2019 Federal Reserve Bank of Boston working paper, using US household data, found that the MPC is lower at higher wealth quintiles. A pound of extra income therefore moves spending more when it reaches low-wealth households.[4]
Everything above is the topic page. The pieces below take it further. Each one trains a particular assessment objective rather than covering the topic again, and they are added over the year.
Figures and facts were checked against these sources on 2 November 2026. Worked numbers labelled "Illustrative figures" are invented for teaching.
The CC Economics revision platform drills consumption, MPC calculations and evaluation chains, and the Inner Academy covers the topic in recorded lessons.
See the Economics platformThe Inner Academy