Spending, Saving, Borrowing

Question 1

Reasons for consumption/spending (2)

Answer 1

1) Survive/satify basic needs
2) Satisfy wants

Question 2

Conspicuous consumption definition:

Answer 2

People buying goods/services that give them a feeling of higher social status (veblen goods)

Question 3

In order to consume, people need:

Answer 3

money from income, borrowing or savings

Question 4

Factors that affect consumption (4)

Answer 4

1) Income
2) Wealth: all valuable possessions minus liabilities/debts (income, savings, real estate, stock investments, jewelry/gold, collector’s items)
3) Consumer confidence about future (expectations)
4) Interest rates (for borrowing money

Question 5

consumption patterns and trends of low income households

Answer 5

Low income families spend most of their money on basic necessities (food, water, housing)

Question 6

consumption patterns and trends of high income households

Answer 6

High income families spend relatively less on basic needs but more on luxurious goods like electronic gadgets and leisure goods

Question 7

Reasons for saving (3)

Answer 7

• Future consumption
• Gain interest over savings
• Precaution (future emergencies)

Question 8

Reasons for borrowing (2)

Answer 8

• Surivive / Unable to buy goods and services
• Price of desired good / service is too high to pay at once (house/car)

Question 9

Factors affecting borrowing (4)

Answer 9

• Interest rates
• Wealth
• Consumer confidence about future
• Availability to borrow

Question 10

Problems with borrowing (2)

Answer 10

• If borrower is unable to repay loan –> bankrupt (person) or insolvent (firm)
• Financial crisis –> Too many US borrowers unable to pay back loan

Question 11

Difference in consequence between mortgage and loan

Answer 11

Loan - Court declares you bankrupt
Mortgage - Bank takes house (you are not considered bankrupt)

Question 12

Interest Rate (2)

Answer 12

1) Cost of borrowing money; borrowing money is actually buying money from a financial lender, like banks
2) Reward for saving money; when households put money in the bank they lend the commercial bank their money

Question 13

What do interest rates determine?

Answer 13

Interest rates determine the level of trade in the economy. More trade –> better for economic growth

Question 14

Business organisations (public sector)

Answer 14

Involvles firms owned/controlled/subsidised by the govt./city council

These firms aim to serve the public interest instead of making profit. They are usually offered for free/low price.

Question 15

Business organisations (private sector)

Answer 15

Involves firms that are privately owned by individuals/group of individuals or shareholders. Their main objective is to make profit or manage private money.

These can be small firms like sole traders (1 owner); partnerships (2 or more owners) to private/public limited companies

Question 16

multinationals

Answer 16

Firms that produce and sell in different countries. Headquarters in 1 country; side offices/factories worldwide

Question 17

public corporations/public sector organisations

Answer 17

Organisations owned by the government
Their objective is to provide goods/services necessary for society.

Question 18

Disadvantages of public corporations/public sector organisations (2)

Answer 18

• Require tax money to be financed
• May become very large and difficult to manage, insufficient

Question 19

Privatization definition

Answer 19

Public corporations become private firms. Have to compete to make profit hence becomes more efficient.

Question 20

Changing type of organisations reasons (2):

Answer 20

• Acquiring more financial funds through stocks/shares
• Protecting the owners from huge debts

Question 21

Advantages of growing as a firm (5):

Answer 21

1) Able to raise more money
2) Attract talented and better skilled employees
3) Become more famous as a brand (may increase sales)
4) Conduct more research to develop new products/improve quality
5) Able to expand into other countries