The influences on spending, saving, and borrowing

What is disposable income?

The income a person has left after all income related charges and taxes have been deducted.

What is consumer expenditure?

Greater the disposable income of a consumer, more is their potential consumer expenditure on goods and services and more they will be able to save. Increasing prices reduce the real purchasing power of income.

What is real income?

Real income is income of individuals or nations after adjusting for inflation.

If you earned $50,000 last year and will earn $50,000 this year, you will have the same amount of disposable income. However, if inflation changes, the buying power you used to have will be affected. If inflation this year falls by 2% Your real income goes up because you can buy more with $50,000 this year than you could last year.

Why do people consume goods?

People buy goods and services to satisfy their wants and needs. Consumption therefore involves the using up of goods and services to satisfy our needs and wants. People tend to spend most of their disposable income on goods and services that give them the most satisfaction and utility.

What are experience goods and services?

An experience good is a product or service that is difficult to evaluate in advance in areas such as price and quality. It is hard to judge how much a consumer likes them until they consume them. If you sell an experience well, reputation, customer loyalty and word of mouth is extremely valuable as these are the primary things that customers can use to make purchasing decisions.

Spending:

Consumption is use of goods and services for the satisfaction of human wants.

People will divide their disposable income between spending and saving. Disposable income is income after income tax. The more disposable income people have, the greater their potential consumer expenditure People will consume those goods and services that provide them with the most satisfaction or utility.

What determines how much we spend?

• Disposable income: more the disposable income, more a person can spend on consumer goods and services that give satisfaction and maximum utility.

• Wealth: the wealthier people are, the greater their spending on goods and services is likely to be. Private wealth consists of the stocks of goods people own that have a money value. It includes financial assets and holdings of company shares and physical assets such as house, jewellery etc.

• Interest rates on bonds and on borrowing: Governments usually increase interest rates on savings and borrowing to try and decrease inflation rates in the economy. If rates on saving are high, people will be inclined to save a higher portion of their disposable income and thus will spend less. If interest rates on borrowing are increased, people will be less likely to borrow. These factors decrease the aggregate demand in an economy and vice versa.

• Consumer confidence: if consumers are confident about their jobs and their future incomes then this might encourage them to spend more now, perhaps even borrow money to buy a house or a car since they have security in their income. However income and employment can change over time as economic conditions change. If consumers think they may be unemployed or suffer failing income then they will be persuaded to save more of their incomes in case they need to depend on them in the future.

• If consumers are confident that their income rate will increase or at least stay the same in the future thus resulting in them spending more. Depends on the certainty of their future.

Expenditure patterns and trends

There is a close relationship between real income and consumer spending.

Other drivers of change in consumer spending patterns include these factors:

• People are living longer

• They have more leisure time: More free time

• They are increasingly health conscious

• There is increasing concern for the environment

• More females have joined the labour force

• New technologies = New wants

Why do our spending patterns differ?

• Income: people with low incomes tend to spend all their income on satisfying their basic needs of food, shelter and education. The propensity to consume their disposable incomes is really high.

• Sex: Men and women have different spending patterns based on their likes.

• Lifestyle:

• Wealth:

• Age: people who are older tend to spend their money on goods such as medication and pharmaceutical products.

• Culture

• Tastes: everyone has different tastes. Some may choose to eat vegetarian which is less expensive than non vegetarian, or some may choose not to wear branded clothes unlike others. This leads to a difference in the amount they spend.

• Family circumstances: If someone has children, that person may choose to save money to ensure that their children have secure futures. Whereas if a young person only has to provide for themselves, they could spend their income on travelling and eating out.

Recent trends in consumer spending

• Real income has risen: Higher incomes enable people to spend more on satisfying their needs and wants. Leads to a change in spending attitudes.

• People work fewer hours than many years ago: This has given more leisure time and has increased spending on holidays, sporting activities and eating out in restaurants.

• Social attitude has changed: More females are going out to work in many countries. This means they have less to look after their families and has increased the demand for time saving appliances such as dishwashers and microwaves. The disposable income of each family increases too, allowing them to spend more

• Population trend: The average age of populations is rising in many countries due to the fall in birth and death rates which has decreased the spending on recreational activities and healthcare in many economies.

• People have become more health conscious: the demand for vegan/vegetarian food items and exercise equipment and gym membership are increasing as people have become more health conscious

• Concern for the environment is growing: demand for products that release less harmful pollutants into the atmosphere when produced and consumed have increased.

• Technology has advanced rapidly: new products become available and have created new consumer wants such as flat screen TVs, smartphones and game consoles.

Marginal propensity to consume:

The portion of income a person spends on buying goods or services is determined by their marginal propensity to consume.

Change in consumption(C)*100/ change in income(Y)

% of your income you spend

MPC for poor people is very high (95%)

Saving

Income - Consumption

Why do we save?

• For future spending

• To earn income from interest

• In case our economic circumstances change

• Because of increased opportunities to save

Saving delays consumer spending to a later date. Withdrawing savings to spend is dissaving

Determinants of saving

• Level of disposable income

• Cost of living

• Interest rates on offer

• Confidence in the economy

Borrowing

• Occurs when spending exceeds income

• Consumers borrow money to finance additional expenditure

• They can then make loan repayments over time from their future earnings

• Personal debt is the total stock of money borrowed and yet to be repaid by a person or a household

What determines how much we borrow?

• Interest rates: When interest rates on borrowing are high, people tend to take less loans. This can be used as a tactic by the government to reduce inflation in an economy.

• Wealth

• Consumer confidence

• Availability of credit