3.2 Households Flashcards
What are households
Households provide factors of production and consume the end products/services.
Functions of the households
Save
Spend
Borrow
What is disposable income
Income left to spend after tax.
Total income - income tax
What is utilitiy
Level of satisfaction derived from consuming a good/service
What is marginal utility
Additional satisfaction derived from consuming an extra unit of a good or service.
Unit of utility
utils
Factors that affect levels of expenditure
Confidence
Wealth
Interest Rate
Disposable income
Factors that influence spending patterns
Age Gender Preferences Leisure time Technology Health Social attitude Disposable income
What is saving
Part of the disposable income an individual chooses not to spend on goods/services, saving it for a future purpose.
Formula for saving ratio
Savings/Disposable Income * 100
Formula for saving ratio
Savings/Disposable Income * 100 (as a percent)
What is dissaving
Withdrawing from saving
How age changes spending patterns
Priority for diff goods and services change as age changes
How gender affects spending patterns
males and females buy diff goods and services
How leisure time affects spending pattern
The more leisure time you have, the higher the chance for you to spend money during that time.
Factors that influence why people save
Future consumption Confidence Markets offering a variety of saving schemes Interest rates Attitude to savings
How does confidence affect why people save
save less when more confident, vice versa.
How interest rates affect why people save
If govt. increase the interest rates you would start saving more money because you get higher amounts of interest on your money.
What is borrowing
Occurs when individuals, firms or the govt. take a loan and pay it back to a financial lender over a period of time, with interest payments.
Why people may borrow
Mortgages Fund Expensive items Fund private/tertiary education Fund large projects Start a company/expand
MP CEE
Factors that affect borrowing
Interest rates
Confidence levels
Availability of funds
Wealth
How do interest rates affect borrowing
The higher the interest rate, the more expensive it is to borrow.
inversely proportionate
How does confidence levels affect borrowing
Higher confidence in income –> more borrowing
More confidence in income means less chance on default
How does availability/ease of funds affect borrowing
The easier it is to borrow money and the more ways there are to borrow money, the higher the borrowing. Eg: credit cards and internet banking.
What is personal debt
The total borrowing by a person or household.
What does defaulting mean
failing to pay a loan
How does wealth affect borrowing
Wealthy individuals can borrow more since they have a higher chance of paying the loan in full and lower chance in defaulting on the loan. Banks are more likely to lend to wealthier individuals.
When could personal debt become a problem
> variable interest loan - even a small change in interests could be a big amount
incomes fall - unemployed or bad health, etc. Won’t be able to pay loan back
Continue to borrow more money - monthly repayments rise significantly
Definition of ‘insolvent’
Person who is declared bankrupt by court and cannot pay back their loans.
Why could high levels of borrowing be very bad for the economy
High borrowing = high montlhy interst payments = more of consumers’ disposable income
They can’t spend on other goods and services. Leads to fall in consumer expenditure which leads to a leftward shift of agg demand curve
Production is cut - unemlpoyment rises. More people may suffer financial hardship and be unable to repay their debts.
Consumer spending would fall even more - vicious cycle- economic reccsion
