HOUSEHOLDS

Chapter 3.2

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 Spending
◦ HH are owners of factor services.
◦ They are also consumers of goods and services.
◦ Disposable income: income after income tax has been deducted and state
benefits received.
◦ As income rises, people usually spend more in total, but less as a percentage
of their income.
◦ The greater the disposable income, greater the consumer expenditure.
◦ Expenditure also depends on real purchasing power which is determined
by prices – real disposable income.
 Consumption
◦ Using goods and services to satisfy needs and wants.
◦ People choose those goods and services that provide them with maximum
utility.
◦ Utility is satisfaction derived from consumption.
◦ Experience goods and services require consumption to determine how
good they are.
Factors influencing consumption
◦Income
◦Wealth - Wealth: a stock of assets including money held in
bank accounts, shares in companies, government bonds, cars
and property.
◦Among the other factors influencing the amount of
expenditure are wealth, confidence, the rate of interest, the
distribution of income and advances in technology.
Factors influencing consumption
◦ One is that wealth generates income which can be spent.
◦ wealth can be cashed in - money from a bank account or selling a car,
and then spent.
◦ people can use their wealth as security for loans.
◦ wealth also affects confidence. If, for example, the value of people’s
housing rises, people will feel richer and are likely to spend more.
 Factors influencing consumption
◦ Confidence is an important influence on consumption. If people feel more
optimistic about their future career prospects and income, they are likely to spend
more. In contrast, if they become pessimistic about economic prospects they will
tend to spend less.
◦ Expenditure may also fall if the rate of interest rises. This is because, it will
make borrowing more expensive, encourage saving and reduce the amount spent
by people who have borrowed in the past. Of course, those people who have
savings will gain more income and consequently, they may spend more. Their
higher spending, however, will be more than offset by reduced expenditure of
others. This is because savers tend to be richer than borrowers and tend to spend
a smaller percentage of their income.
Consumption patterns
◦ Analysis of consumption patterns allows firms to target consumer needs and advertise
goods and services to those consumers who are most likely to buy them.
◦ Average propensity to consume (APC): the proportion of household disposable
income which is spent.
◦ It is calculated by dividing consumption by disposable income.
◦ Consumption: expenditure by households on consumer goods and income.
◦ When people spend more than their income, they are said to be dissaving. This is
because they are either drawing on their past savings or, more likely, borrowing other
people’s savings.
◦ As people become richer they buy more and better quality products. However, whilst the
total amount spent rises with income, the proportion spent tends to fall.
Consumption patterns
Consumption patterns
◦ Spending habit may vary due to age, gender, tastes, family
circumstances.
◦ Young male
Consumption patterns
◦ Middle aged women with children
Consumption patterns
◦Retired
 Consumption patterns
◦ Age
◦ Households without children are likely to spend a higher proportion on recreation and
eating out than households with children.
◦ Some households may value cultural activities more than others, whilst others may be
keener to spend more on medical care.
◦ The retired tend to spend a higher proportion, than average, on heating and a lower
proportion on transport and entertainment.
◦ On the other hand, people in their late teens and twenties often spend a higher proportion
on clothing and entertainment.
◦ Explore the consumption patterns of different age groups in USA, China, India,
Germany.
Consumption patterns
◦ Social attitudes – women have started going out for work, increasing the need for
appliances.
◦ Population trends - falling birth and death rates have led to increased spending
on healthcare and recreational activities.
◦ Fall in size of families have led to increased spending on furnishing, travel.
◦ Environment, health, technological advancement.
 Saving
◦ Savings – delaying consumption when people withdraw their savings along with interest.
◦ As incomes rise, savings also rise.
◦ Savings ratio: the proportion of household disposable income that is saved.
◦ contractual. This means that people sign a contract, agreeing to save a certain amount on
a regular basis. The main forms of contractual saving are insurance policies and pension
schemes.
◦ Non-contractual saving includes placing money in bank and building society accounts,
buying government securities, shares and property. By its very nature, non-contractual
saving varies more with time and is more heavily influenced by changes in interest rates
than contractual saving
Why do people save?
◦ Future consumption - People also save for their retirement, for their children’s
future, When people retire, their income from their work stops. Even if they receive a
state pension and an occupational pension, income from savings can make their
retirement more comfortable. Some people save in order to help finance their children’s
education or to leave them an inheritance when they die. Most people like to have some
savings to cope with emergencies and unexpected problems and take advantage of any
unforeseen opportunities.
◦ Interest rates - higher interest rates make saving attractive. The more people save, the
more interest they tend to receive not only in total, but also per unit saved. Those who
hold their savings in the form of shares, government bonds or a house, may also hope
that they will benefit from a rise in the value of their assets.
Why do people save?
◦ Consumer confidence
◦ People save money for future if they are insecure about their future employment or
financial circumstances.
◦ They will reduce their current consumption if they have low confidence about future.
◦ They may save more if they think prices will increase in future to afford higher price.
◦ Saving schemes
◦ Some people also save to increase their current income. The more people save, the more
interest they tend to receive not only in total, but also per unit saved.
◦ Save in tax savers.
Saving patterns
◦ Income - As disposable income rises, the total amount saved and the proportion saved
(the savings ratio) increases.
◦ rate of interest. A rise in the rate of interest may reduce some target saving as people can
now attain their target amounts by saving less.
◦ The tax treatment of savings. Tax concessions on the income earned from saving will
encourage people to save.
◦ The range and quality of financial institutions. The greater the variety of saving
opportunities on offer, the more likely people will find a scheme that will suit them.
◦ Age structure. The young and the old tend to save less than middle-aged people. The old,
especially the very old, draw on their savings to ensure a reasonable living standard during
retirement.
◦ Social attitudes. The attitude to saving varies between countries. In some it is held in high
esteem, while in others prefer to spend most of their income when they receive it.
Income and saving
◦ Saving is disposable income which is not spent.
◦ As disposable income rises, both the total amount saved and the proportion of disposable
income saved increases.
◦ APS plus APC add up to 1, since disposable income is either spent or saved.

◦ In the breakout rooms assigned, research to support the view that saving are
impacted by cultural and societal differences.
Borrowing
◦ Borrowing enables people to spend more than their current disposable
income.
◦ involves a cost in the form of interest which has to be paid. It is also usually a
temporary situation as loans and overdrafts have to be repaid.
◦ Personal debt – total stock of borrowing by a person or a household.
◦ People borrow money for a range of requirements. Research and
suggest what are some of the most common reasons for borrowing.
◦ People unable to repay loans will be declared insolvent by the court with their
belongings seized and personal assets sold to repay the debts.
Borrowing
◦ Borrowing has risen in various countries over the years, raising concerns
that borrowing has become cheap and easy.
◦ Increasing borrowing means increased expenditure on paying off loans and
interest and less expenditure on goods and services, leading to reduced output
and increased unemployment.
◦ It could eventually lead to recession or decline in economic growth.
Influences on borrowing
◦ The availability of loans and overdrafts. The easier it is to borrow, the more likely people
are to borrow.
◦ The rate of interest. A rise in the rate of interest will increase the cost of borrowing,
which is likely to reduce borrowing.
◦ Confidence. The more confident people are about the future, the more they will
anticipate earning in the future. They may adjust their spending patterns now, financing
some of their extra expenses by borrowing with an expectation that their higher income
will enable them to repay their loans.
◦ Social attitudes. Some countries and some groups within countries are more concerned
about the risks of people getting into debt by borrowing, than others.
◦ Wealth – people with wealth can find borrowing easier. They have collateral to offer as a
security against a loan.