Consumer Spending Explained, With the Help of Marge Simpson

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During an episode of The Simpsons, Marge debates over whether she should buy a dress and ultimately decides to make the purchase, using the infamous line: “It’ll be good for the economy.” 

We’re going to use this example to dive into the significance of consumer spending and what it can tell us about the state of the economy.

Consumer spending is defined as all spending on final goods and services for current personal or household use. A “final good” is a product that is used directly to satisfy a consumer’s needs, such as a dress. In contrast, an intermediate good is a good used to create the final good, such as the fabric for the dress.

Before we dive any further into consumer spending, let’s do a quick review of supply and demand

The law of demand states that as prices increase, the demand for the product decreases. The law of supply states that as the selling price of a product increases, the supplier will increase production.

Let’s say Marge buys the dress and wears it to work the next day. At the office, her colleagues fall in love with the dress and all run over to the store to buy it. But when they get to the store, there are already 20 women and only three dresses left. The store owner recognizes that there’s high demand for the dress, more than what the store is currently supplying. Because of that demand, the owner can increase the price of the dress while still being confident it will sell.

But the next time the owner is ordering dresses for the store, the owner decides to order ten times as many dresses as usual to meet the high demand. However, because there are so many dresses available now, the owner can’t charge the same high prices.

Supply and demand are inversely related and intersect at a point we call the equilibrium — the price at which the quantity demanded and quantity supplied are equal.

Investors gain important insight from consumer spending

Consumer spending is a major player on the demand side of supply and demand. When consumers are spending money, the demand for goods increases — meaning the supply for goods increases. Most businesses are directly reliant on consumers. If people aren’t buying goods, companies aren’t selling goods, which negatively affects a public company’s stock value. On the flip side, if consumers are spending a significant amount on goods, companies will be able to expand by hiring more workers, opening more factories and supplying more goods. When a company expands, its stock value will increase. Investors watch companies’ stocks to strategize actions that will best maximize profit.

Consumer spending powers the economy

Consumer spending is largely responsible for the state of a country’s economy. When people are confident with the strength of an economy as a whole, they buy goods. When people are wary of the state of the economy, they save. For example, let’s say Marge decides to get a job at the store. If the store is selling a bunch of clothing and expanding into new locations and hiring more people, she will likely feel secure in her job and income status. When a company expands, the workers it hires have more disposable income, which in turn will contribute to an increase in total consumer spending. However, if the store is struggling and has begun to let people go, Marge will likely save her money so that she is financially prepared if she is let go.

Without a stable income, Marge will likely try to spend as little as possible. While one person changing their spending habits will not have a great impact on the economy, if Marge’s actions are reflective of the rest of society, this could spark a cycle of decreased consumer spending, decreased demand, decreased production and so on.

So the next time you’re debating buying a dress, a tv, or even a new car, just remind yourself: it’ll be good for the economy.

Terms to know

Autonomous consumption: Autonomous consumption refers to the goods that a consumer must purchase, regardless of their income (like food and rent).

Induced consumption: Induced consumption is dependent on disposable income (the money one has left to spend after required expenses are accounted for). For example, if Marge has a lot of disposable income, she can buy mountains of new dresses. But if her disposable income is limited, she may have to skip the dresses.

Consumer confidence index: The consumer confidence index is a way to track the general public’s confidence in the strength of the current and future economy. The survey, which is distributed by The Conference Board, evaluates 5,000 U.S. households and asks them a range of questions pertaining to their confidence in their current and future financial standings and their current and future views on the economy as a whole. The assumption is that when consumers are confident in the economy, you can expect higher consumer spending. When the general public is feeling uncertain about the economy, you can expect increased savings.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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