Syllabus: Pearson - Pearson - A Level Economics
Module: 2.2 Aggregate demand (AD)
Lesson: 2.2.2 Consumption (C)

Introduction

This article focuses on 2.2.2 “Consumption (C)” from the Pearson Edexcel A Level Economics A specification. Situated within Theme 2: The UK economy – performance and policies, this topic deepens students’ understanding of the factors influencing consumer expenditure and its central role in aggregate demand (AD). As consumption represents a substantial proportion of AD, it underpins much of the UK’s macroeconomic activity. Teaching it effectively sets students up for success in both analysis and evaluation questions across Papers 2 and 3.

Key Concepts

According to the specification, students need to understand:

• Disposable income: The role of income after taxes and transfers in influencing consumption.

• Interest rates: How borrowing costs and saving incentives shape consumer behaviour.

• Consumer confidence: The psychological aspect of spending—linked to expectations about the economy.

• Wealth effects: The impact of changes in house prices or stock markets on household spending.

• Household debt: The relationship between borrowing levels and future consumption patterns.

• The marginal propensity to consume (MPC): The proportion of additional income spent rather than saved.

• Life-cycle and permanent income hypotheses: How expectations about lifetime income can affect current consumption.

Quantitative understanding of these drivers and their impact on AD shifts is essential for exam performance.

Real-World Relevance

Consumption has been at the heart of recent economic shifts in the UK. For example:

• Post-pandemic recovery: After COVID-19 lockdowns, pent-up demand caused a sharp rise in consumption, contributing to inflationary pressure.

• Cost of living crisis: Rising energy bills and food prices in 2022–2024 led to a decline in real disposable income, suppressing household consumption.

• Interest rate changes: Since 2021, the Bank of England’s base rate increases have cooled the housing market and reduced discretionary spending.

Mini case study suggestion: Students can analyse how rising mortgage costs have impacted different income groups’ spending patterns, connecting microeconomic inequality with macroeconomic effects.

How It’s Assessed

Consumption content features in:

• Paper 2: Macroeconomics – including data response and extended open-response questions.

• Paper 3: Synoptic paper – where students must link micro and macro factors (e.g. consumer behaviour and AD shifts).

Typical command words include:

• “Analyse” – break down how a factor (e.g. interest rates) affects consumption and AD.

• “Evaluate” – assess the importance or impact of consumption compared to other components of AD.

• “Discuss” – consider multiple influences and how they interrelate.

Graphical analysis using AD/AS models is frequently required, and calculations involving MPC or income changes may appear as numerical prompts.

Enterprise Skills Integration

This topic offers a great launchpad for applied economic thinking. Activities that align with Enterprise Skills’ “learning by doing” model include:

• Scenario-based simulations where students act as households reacting to policy changes.

• Budgeting tasks that explore how real-world constraints influence marginal decisions.

• Group debates on consumer confidence, supported by current data.

Skills developed:

• Problem-solving: Weighing trade-offs under changing economic conditions.

• Decision-making: Evaluating policy impacts on household behaviour.

• Numeracy: Applying quantitative models to interpret consumer data.

Careers Links

Understanding consumption is directly relevant to careers in:

• Economic policy (e.g. Treasury, Bank of England)

• Financial services (e.g. banking, mortgage lending, personal finance advising)

• Market research (e.g. analysing consumer trends)

• Retail and marketing (e.g. understanding spending drivers)

Mapped to Gatsby Benchmarks 4, 5, and 6, this topic supports:

• Curriculum linking to careers

• Employer-aligned experiences (e.g. guest speakers from finance)

• Workplace scenarios through classroom simulations

Teaching Notes

Common pitfalls:

• Students often confuse shifts in AD with movements along the curve—spend time clarifying this.

• Confusion between disposable and discretionary income can muddy their analysis.

• Overreliance on theory without applying to current UK context weakens evaluation responses.

Time-saving strategies:

• Use plug-and-play scenarios from Skills Hub to model income changes or policy shocks.

• Assign consumption case studies as prep to reduce in-class teaching time on context.

Extension ideas:

• Invite students to track consumer confidence indexes over a term and correlate to major news events.

• Host a simulation challenge where students model the impact of government stimulus on AD, comparing MPC across income brackets.