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Chapter 17 - Households - CIE IGCSE/O Level Economics

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Published in: Economics
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Revision summary of Chapter 17 - Households of the CIE IGCSE & O Level Economics syllabus.

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  1. HOUSEHOLDS CHAPTER 17 'Ill
  2. Learning Objectives Spending • discuss the influences on the spending of households Saving discuss the influences on the saving of households Borrowing discuss the influences on the borrowing of households
  3. SPENDING INFLUENCES ON
  4. wealth Generates income (i.e. dividend from stocks) Improves liquidity (i.e., it can be cashed in) Affects confidence Makes borrowing easier (it can be used as collateral) interest rates Negatively correlated with interest rates: expenditure generally falls if the rate of interest rises Why? The cost of borrowing becomes more expensive, while the reward for saving increases disposable income Main influence on household expenditure As income rises, people usually spend more in total, but less as a percentage of their income.
  5. disposable income When people spend more than they earn, they are dissaving - ommon among poor people The poor tend to spend a higher proportion of their income, and total expenditure, on food and clothing than the rich. spending Average propensity to consume (APC): proportion of spent disposable Income. APC + APS 1 saving As income rises people are able to both spend and save more. Average propensity to save (APS ratio): the proportion of household disposable income that is saved.
  6. The relationship between disposable income and consumption can also be shown graphically. Figure 17.1 shows that at very low levels of income, there is dissaving. At Z level of income, all income is spent. Then as income rises past Y, saving occurs. Over the complete range of income, expenditure continues to rise but it rises at a slower rate Consumption Z Disposable income Fig. 17.1: The relationship between disposable income and consumption
  7. SAVING INFLUENCES ON
  8. Incom As disposable income rises, the total amount saved and the proportion saved Wealt Wealthihr people save more Social attitudes If its the norm to save in one's family or region, they will save more Banker to the commercial banks Enables CBs to pay one another and draw out cash if liquidity is low Age structure The young and the old tend to save less than middle-aged people, while the old rely on their savings. Taxing on savings Tax concessions on the income earned from saving will encourage people to save. Interest rate As it raises, saving does too 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.
  9. SAVING INFLUENCES ON
  10. Borrowing Enables people to spend more than their current disposable income. Both the poor and the rich borrow The rich borrow to finance projects and pay less taxes The poor borrow to finance basic expenses such as groceries and rent The poor may struggle to get loans as they have poor credit scores and no assets to offer as collateral Influencing factors The cost of borrowing: the cheaper the interest rate, the more people will borrow The availability of loans and overdrafts: when it is straightforward to borrow, i.e. no collateral needed, people will borrow more Confidence: the more confident people are about their future earinings, the more they'll borrow in the present (prospect of upward mobility) Social attitudes: i.e., is it common for people in an individual's family to borrow?
  11. You should know... Disposable income can be spent or saved. APC + APS = 1 As disposable income rises people spend more in total, but less as a percentage. Saving rises in total and as a percentage of disposable income, as people get richer. The poor spend a higher proportion of their total expenditure and disposable income on food and other basic necessities than the rich, but a smaller proportion on luxuries. The influences on expenditure include the level of disposable income, wealth, confidence, the rate of interest, the distribution of income and advances in technology. Some forms of saving are contractual and some are non-contractual.
  12. You should know... People save to buy certain products, to make their retirement more comfortable, to help their children, to cope with unexpected expenses and opportunities and to earn income. The main influences on saving are income, wealth, the rate of interest, the tax treatment of saving, the range and quality of financial institutions, age structure and social attitudes. By borrowing, people can spend more than their disposable income. The key influences on borrowing are the availability of loans, the rate of interest, confidence and social attitudes.

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