3.2 - Households Flashcards
What influences ones ability to spend?
Disposable income: Income after income tax has been deducted and state benefits have been received. Disposable income is the money that households have left over from their salary/wages after they have paid their taxes & have received any transfer payments/benefits from the government
Consumption increases as disposable income increases & decreases as disposable income decreases
Changes to interest rates: Interest rates are set by the government’s Central Bank
Changes to the base rate cause commercial banks to change the lending rates they offer customers
If interest rates increase then the cost of borrowing increases. Higher borrowing costs = less consumption
If interest rates increase, the monthly repayment on any existing loan increases. Higher loan repayments = less consumption
Changes to confidence levels: The stronger the economy, the higher consumer confidence. Consumers feel secure in their jobs & are confident of receiving regular salary payments. Therefore consumption increases
In a weakening or recessionary economy, consumer confidence falls. Consumers feel less secure in their jobs & consumption decreases
How does pattern of income spent change between people earning more and less?
Higher incomes: As incomes rise, the ability to spend and save increases
When the total amount spent rises with income, the proportion spent tends to fall
They tend to buy a greater variety and quality of goods, including on more luxury goods and services
Lower incomes:
When people are poor, they cannot afford to save as all of their disposable income will be spent on buying basic necessities to survive
The poor tend to spend a higher proportion of their income on food and clothing
What is average propensity to consume?
The proportion of household disposable income which is spent
Average propensity to consume = Consumption/ Disposable income
What is the different between income and wealth?
Income is the flow of money obtained from the factors of production
Wealth is the stock of assets including shares bonds and properties
What is the relationship between disposable income and saving?
The higher the disposable income the more someone saves because of the proportion of money save increases.
What are the factors effecting the influences of saving
Why when people save does employment increase?
When people save there will be a higher risk of unemployment because people will be spending less disposable so the demand for goods and services will be less income spent on products less services will be needed so a likely rise in unemployment
Why do firms lose out on profits when people save?
People will have less disposable income so there will be less investment and spending on products meaning the firms will still make revenue but won’t make as much profit as needed they will not be spending as much money less revenue will be made though so their cost of production will still be there and employee payment so they will make less profit impacts firms ability to make revenue which impacts on the firms ability to make cost impacts the ability to reinvest
How does saving money help people survive economic changes?
When people save money they gain more money back from interest so they end up with more money than they originally have. Banks can give back more money. Job loses. Salary has gone down. Medical bills has increased. Turn to the Government for welfare result-oppotunity cost. This can reduce the level of financial stability in a economy and make it more resilient
How does saving create economic growth?
When there is an increase in savings, banks will have more income to lend to businesses who want to reinvest in the economy and create jobs This boost economic growth and creates more employment opportunities and increases productivity
What is borrowing?
Moves income from people who do not want to spend it to those who need more money than the currently have
What effects the rate of borrowing?
Confidence -To take out more expenses because of confidence to take more money out
Availability of loans - How easy is it to borrow how much banks are willing to lend
interest rate - If interest rates are higher people have to deal with inflation with rising return prices
Rises in interest rate increase the cost of borrowing decrease the amount of people borrowing
