Disposable income is the income of a person after all income-related taxes and charges have been deducted.

Spending (Consumption)

The buying of goods and services is called consumption. The money they spend through consumption is called consumer expenditure.

Why do people consume?

To satisfy their needs and wants and give them satisfaction.

Factors affecting consumption:

  • Disposable income: the more the disposable income, the more people consume
  • Wealth: the more wealthy (assets such as property, jewels, company shares) a person is, the more he spends
  • Consumer confidence: If consumers are confident of their jobs and their future incomes, then they might be encouraged to spend more now, without worries
  • Interest rates: if interest rates provided by banks on saving is high, consumers might save more so they can earn interest and consumer expenditure will fall.

Saving is income not spent or delaying consumption until some later date. People can save money by depositing in banks, and withdraw it a later date with the interest.

Factors affecting saving:

  • Saving for consumption: people save so that they can consume later. They save money so that they can make bigger purchases in the future (house, car etc). Thus, saving can depend on the consumers’ future plans
  • Disposable income: if the amount of disposable income people have is high, the more likely that they will save. Thus, rich people save more than poor people
  • Interest rates: people also save so that their savings may increase overtime with the interest added. Interest is the return on saving; the longer you save an amount and the higher the amount, the higher the interest received
  • Consumer confidence: if the consumer is not confident about his job security and incomes in the future, he may save more now
  • Availability of saving schemes: banks now offer a variety of saving schemes. When there are more attractive schemes that can benefit consumers, they might resort to saving rather than spending.

Borrowing, as the word suggests, is simply the borrowing of money from one person to another. The lender gives the borrower money. The lender is usually the bank which gives out loans to customers.

Factors affecting borrowing:

  • Interest rates: interest is also the cost of borrowing. When a person takes a loan, he must repay the entire amount with an extra amount interest, which is fixed by the bank. When the interest rates rise, people will be more reluctant to borrow and vice versa
  • Wealth/Income: banks will be more willing to lend to wealthy and high-income earning people, because they are more likely to be able to repay the loan, rather than the poor. So, even if they would like to borrow, the poor end up being able to borrow much lesser than the rich
  • Consumer confidence: how confident people feel about financial situation in the future may affect borrowing, too. For example, if they think that prices will rise (inflation) in the future, they might borrow now, so that they can make big purchases
  • Ways of borrowing: the no. of ways to borrow can influence borrowing. Nowadays there are many borrowing facilities such as overdrafts, bank loans etc. and have more credit (period of payment) options such as hire purchases (payment is done in stages/installments overtime), credit cards etc.


Expenditure patterns between income groups

The richer people spend, save and borrow more amounts than the poor.
The poor spend more proportion of their disposable income, especially on necessities, than the rich.
The poor save less proportion of their disposable income in comparison with the rich.



Notes submitted by Lintha

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