Define
disposable income
Personal income remaining to spend or save after direct income taxes have been deducted from it.
However, inflation will reduce the amount people can buy with their income (reduces real purchasing power). Therefore, the amount individuals can choose to spend depends on their real disposable income.
Define
consumer expenditure
Spending on goods and services for final consumption.
Define
utility
The satisfaction a person gains from consuming a good or service.
In general, people will choose to spend their disposable incomes on consuming those goods and services that provide them with the most utility.
What factors may affect different people’s spending patterns? (i.e. what products they want to buy)
- income
- gender
- wealth
- age
- culture
- lifestyle
- tastes
- family circumstances
Define
experience goods and services
Products for which it is difficult to judge how much we will enjoy them until we consume them.
People’s tastes may change over time if they try new products, which affects patterns of consumer expenditure.
What factors determine how much people will spend?
- disposable income
- wealth
- The stock of financial and non-financial assets a person or a household owns that have monetary value.
- consumer confidence
- confidence about employment and income
- interest rates
- cost of borrowing money, reward for saving money
Why have the following consumption trends been observed in many developed countries?
- lower proportion of spending on food, transportation, clothing and footwear
- lower proportion of spending on alcohol and tobacco
- increased proportion of spending on health care, housing, household products and entertainment
- real incomes have risen
- people work fewer hours, giving them more leisure time
- social attitudes have changed; more women work instead of looking after their families, increasing demand for time saving appliances
- couples are marrying later in life and having fewer children
- people have become more health conscious, increasing demand for exercise equipment/activities and healthier foods
- concern for the environment is growing, increasing demand for ‘green’ products
- technology has advanced rapidly, creating new wants
Define
saving
Deferred consumption or the accumulation of wealth.
Define
savings ratio
Total savings in an economy as a percentage of total disposable income.
What factors determine how much people will save?
- saving for consumption
- people save money to make bigger purchases later on
- interest rates
- consumer confidence
- availability of saving schemes
- the more ways people can save, the more they might be tempted to do so
Define
dissaving
Withdrawing or spending from savings, for example to meet living expenses when income is not sufficient.
Why do people borrow money?
- to increase their expenditure, usually for a particular good or service they want that is expensive relative to their weekly or monthly earnings
- some people on very low incomes may borrow simply to pay everyday bills, e.g. electricity and phone charges
- small business owners may borrow to help set up their business
- a worker may borrow to finance a training or education course to improve their skills
Define
mortgage
A long-term loan for buying property.
Define
personal debt
The total stock of money borrowed and yet to be repaid by a person or a household
What factors determine how much people will borrow?
- interest rates
- larger loans are more risky, so financial institutions will charge a higher interest rate
- wealth
- lenders are more willing to lend to wealthy people as there is less risk
- consumer confidence
- ways of borrowing
- availability of credit
Define
default
A term used to describe a situation when a person, firm or government fails to meet their loan repayments on time
Define
collateral
Security taken by a lender against a loan, such as a valuable asset owned by the borrower that the lender could sell to recover the value of the loan if the borrower is unable to repay it.
Define
insolvent
A term referring to people or organizations unable to pay off their debts.
People declared bankrupt or insolvent may have property and other goods repossessed by their lenders or creditors. They may be forced to sell their assets to repay the money they owe.
What will be the likely impact on spending, saving and borrowing of an increase in:
real income
- Spending: increase
- Saving: increase
- Borrowing: increase
Rising real incomes make people better off
What will be the likely impact on spending, saving and borrowing of an increase in:
direct tax
- Spending: decrease
- Saving: decrease
- Borrowing: increase or decrease
Increased direct taxes mean less dispoable income. Some people may borrow more to maintain spending.
What will be the likely impact on spending, saving and borrowing of an increase in:
wealth and consumer confidence
- Spending: increase
- Saving: decrease
- Borrowing: increase
Wealth and confidence may encourage people to increase their expenditure, perhaps even to borrow money to make purchases. If people think inflation will rise rapidly in the future they may borrow now to make their payments before prices rise.
What will be the likely impact on spending, saving and borrowing of an increase in:
interest rates
- Spending: decrease
- Saving: increase
- Borrowing: decrease
Rising interest rates make borrowing more expensive and saving more attractive
What will be the likely impact on spending, saving and borrowing of an increase in:
availability of saving schemes
- Spending: decrease
- Saving: increase
- Borrowing: decrease
More and better ways of saving and earning interest can encourage saving
What will be the likely impact on spending, saving and borrowing of an increase in:
availability of credit
- Spending: increase
- Saving: decrease
- Borrowing: increase
Cheap, widely available credit cards and loans encourage people to increase their personal debt
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Money and Finance40
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Occupations and Earnings27
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The Growth of Firms19
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Competition31
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Government Economic Policy30
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Organisation of Production16
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Social Costs and Benefits12
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Taxation18
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Types of Business Organisation34
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Price inflation24
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The Role of Trade Unions16
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Spending, saving and borrowing24
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International Specialisation and Trade17
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Balancing international payments31
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Employment and unemployment25
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Output and Growth16
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Developed and less-developed economies15
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Population17
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Economic systems1
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How markets work18
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The basic economic problem8
