Economía

HOUSEHOLDERS: Owners of factors of production and consumers of goods and services

who earn money from factor rewards to buy those they want and need. Theirs not spended
income can be saved.
DISPOSABLE INCOME: The income a person has left after income-related taxes and
charges. The person is able to choose how to dispose of it, how much of it to spend and
what to spend on it.
Rise in income taxes→ reduction in disposable income.
+Disposable income→ greater potential consumer expenditure on goods and services.
+Disposable income→ more able to save.
How much can people buy with disposable income depends on prices.
High disposable income→ consumption of different goods/services for pleasure.
Low disposable income→ satisfy basic needs.
Global economic growth increases real incomes and, with it, consumer expenditure over
time.
WHY DO PEOPLE CONSUME GOODS AND SERVICES?
Consumption involves the using up of goods and services to satisfy our needs and wants.
People choose to spend disposable income on consuming those goods and services which
provides them more utility.
If a person buys too few of cake, their utility won't be maximized. However if they buys and
eats too many at once he may feel sick and his utility will start to fall. They should have
bought fewer cakes and instead spent his money on things that would have given them more
pleasure than the extra cakes.
+ Consumption of a product→ provides us less utility.
PEOPLE TASTES
They vary between the different groups of consumers according to their age, sex and family
circumstances. They can change over time and may be influenced by the views of other
consumers.
EXPERIENCE GOODS AND SERVICES: Type of products which are difficult to judge how
much we might like them until we consume them and because we can also tell other people
about our experience of them.
MOST IMPORTANT FACTORS THAT AFFECT THE LEVEL OF CONSUMER
EXPENDITURE IN AN ECONOMY:
- INCOME
- WEALTH: The wealthier people feel, the greater their spendings on goods and
services is likely to be. Private Wealth: stock of goods owned that have a money
value.
- CONSUMER CONFIDENCE: If consumers are confident about their jobs and their
future incomes they will probably spend more now. If consumers think they may
become unemployed, they will probably save more.
- INTEREST RATES: Interest rates high→people save more. Interest rate low→people
save less and may borrow more.
CONSUMER SPENDING VARIES WITH INCOME
Proportion of disposable income a person spends on goods and services is measured by
Propensity to Consume. If income rises, spending may rise.
SAVING→ WHY DO PEOPLE SAVE?
FOR FUTURE CONSUMPTION
People save money to make bigger purchases later on/ to spend on goods and services
when they get older.
INTEREST RATES
The higher the rate of interest the more return on money people save in bank saving
accounts. High income→ able to save more. Less income and if there is more inflation too→
save less and consume more since the value of savings will be eroded by price inflation
faster than interest can add to the value of things.
CONSUMER CONFIDENCE
If consumers are confident about their jobs and their future incomes they will probably spend
more now. If consumers think they may become unemployed, they will probably save more.
Many people save if they think the circumstances change.
AVAILABILITY FOR SAVING SCHEMES
The more ways people can save, the more they might be tempted to do so. Banks now offer
a wide variety of saving schemes with different terms and conditions to suit different people.
The more people are willing to save, the higher the rate of interest.
DISSAVING: The spending of savings that have been accumulated over time to help pay
living expenses.
WHY DO PEOPLE BORROW MONEY?
To increase their expenditure on goods and services, usually for a particular good or service
they want and is expensive relative to their weekly or monthly earnings. They can pay off the
loans over time. People on low incomes may borrow to help pay living expenses.
Also to buy other assets (tools to do their job, help set up a person's business, etc).
MORTGAGES: Loans to buy property, they may take many years to pay off.
PERSONAL DEBT: Total stock of accumulated borrowing by a person or a household.
WHAT DETERMINES THE LEVEL OF BORROWING?
- INTEREST RATES: Cost of borrowing money. Loans from borrowing money from
banks have to be repaired with interest. +interest→ +costly to repair the loan.
+interest→ demand for loans tends to contract. +money a person borrows→ +longer
period of time the person has to repair it. Determined by central banks.
- WEALTH: +wealth a person has→ + able to borrow from banks (they will probably
repair it). Banks are often willing to lend more money to wealthy people than to not
wealthy people since the first option involves less risk. Wealthy people are less likely
to Default on their loan repayments. Banks often secure large loans to people against
physical assets they own since these assets provide lenders with collateral against
their loans. Banks can take possession of secured assets or force their owners to sell
them off if their loans are not repaid.
- CONSUMER CONFIDENCE: How confident people feel about their current and
future financial situation may affect their decision to borrow money.
- WAYS OF BORROWING AND THE AVAILABILITY OF CREDIT: + easier to borrow
money (the greater the availability of credit) → + inclined people may be to borrow.
Now, there are so many ways to arrange credit.
PROBLEMS OF BORROWING
For people with low or fixed incomes if:
- they continue borrowing more money, so that their monthly loan repayments
increase.
- they have variable rate loans and there is an increase in interest rates.
- their incomes fall.
People who are unable to repay their personal debts will be declared INSOLVENT. Any other
goods they have may be repossessed or forced to sell their assets.
PROBLEMS OF BARTERING→ Inefficient method of exchange.
- FIXING A RATE OF EXCHANGE: In the barter system, the value of each good must
be expressed in terms of other goods.
- TRYING TO SAVE: Meat/cheese/etc cannot be saved.
- FINDING SOMEONE TO SWAP WITH: Sometimes, there is no double coincidence
of wants (before two people can barter they must both want the good that the other
person has).
FUNCTIONS OF MONEY
- MEDIUM OF EXCHANGE: It's not necessary to find a different person who is
willing to barter since money is a generally accepted good.
- MONEY AS A STORE OF VALUE: Some goods are difficult to save (problem
of barter). Money is usually a good store of value and tends to whole over
time unless prices are rising rapidly. Save to make purchases later. The
rapidly rising of prices due to inflation affects this function of money.
- MONEY IS A MEANS OF DEFERRED PAYMENT: When a person buys
goods on credit it is not always necessary to pay for them immediately. If
there is inflation, this function is affected since money loses value over time
and cannot be used for a payment which is done later. In barter this function
might not make since→ if I receive a desk and I pay with some apples one
month later the apples might not be fresh.
- MONEY AS A UNIT OF ACCOUNT: Money provides a measure of value. It
avoids fixing prices of goods and services in term of a
other goods and services.