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E-NOTES
HOUSEHOLDS
Disposable income is the income of a person after all income-related taxes and charges
have been deducted.
Spending (Consumption)
The buying of goods and services is called consumption. The money spent on
consumption is called consumer expenditure.
People consume in order to satisfy their needs and wants and give them satisfaction.
• Disposable income: the more the disposable income, the more people consume.
• Wealth: the wealthier (having assets such as property, jewels, company shares) a
person is, the more he spends.
• Consumer confidence: if consumers are confident of keeping their jobs and their
future incomes, then they might be encouraged to spend more now, without
worries.
• Interest rates: if interest rates provided by banks on saving are high, consumers
might save more so they can earn interest and thus consumer expenditure will fall.
Saving
Saving is income not spent (or delaying consumption until some later date). People can
save money by depositing in banks, and withdraw it a later date with the interest.
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• Saving for consumption: people save so that they can consume later. They save
money so that they can make bigger purchases in the future (a house, a car etc).
Thus, saving can depend on the consumers’ future plans.
• Disposable income: if the amount of disposable income people have is high, the
more likely that they will save. Thus, rich people save a higher proportion of their
incomes than poor people.
• Interest rates: people also save so that their savings may increase overtime with
the interest added. Interest is the return on saving; the longer you save an amount
and the higher the amount, the higher the interest received.
• Consumer confidence: if the consumer is not confident about his job security and
incomes in the future, he may save more now.
Borrowing
• Interest rates: interest is also the cost of borrowing. When a person takes a loan,
he must repay the entire amount at the end of a fixed period while also paying an
amount of interest periodically. When the interest rates rise, people will be reluctant
to borrow and vice versa.
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• Consumer confidence: how confident people feel about their financial situation
in the future may affect borrowing too. For example, if they think that prices will
rise (inflation) in the future, they might borrow now, to make big purchases now.
The richer people spend, save and borrow more amounts than the poor.
The poor spend higher proportions of their disposable income, especially on
necessities, than the rich.
The poor save lesser proportions of their disposable income in comparison with the rich.