Strictly speaking, we do not ‘use up’ many of the things we buy. Durable consumer goods have a long life, and we often discard them long before they are worn out. We consume goods because they provide us with satisfaction, pleasure or benefit. Early economist used the word utility to describe these satisfactions.

Consumers’ spending and saving is clearly influenced by the amount of income they receive.

Types of personal income

Personal income is derived from many sources such as wages and salaries, rent, dividends, interest .social security benefit etc.

There are several ways measuring of personal income:

a)      Gross personal income:-This is the total personal income from all sources.

b)      Disposable personal income= Gross personal income – Income tax and National Insurance contribution.

c)       Real disposable income:-This refers to the quantity of goods and services which disposable income can buy. It is the purchasing power of the money income.


Factors that affect consumers’ spending and saving

a)      Incomes: – Personal disposable income can be either spent or saved .An increase in total disposable income leads to an increase in total consumer spending. When incomes are very low, there will be no saving. The whole of disposable income will be required to buy the basic necessities of life.

b)      The level of interest rates: – One would expect that higher rates of interest would attract more savings than lower rates.

c)       Changing in the rate of income tax: – The ability to spend depends mainly on the level of disposable income. A fall in the rate of income tax will tend to increase consumer spending. An increase in the income tax will probably reduce consumer spending, although, in this case, many people might decide to reduce their savings.

d)      Borrowing:-If it becomes easier and cheaper to obtain goods on credit, there would tend to be a significant increase in consumers spending on durable goods.

e)      Specific savings targets:-  If a person has a specific saving target, then whatever may be the case of the consumer tries to spend less and save more to achieve his savings target.

f)       Tastes and life style:-Consumers saving and spending depends on their tastes and life style. If a consumer goes for a better tastes and life style, then he has to spend more and save less

Why and how people save

People save money because of the following factors

Income:-The main influence on personal saving is the level of disposable income, because this determines the ability to save.

Saving is a good social attitude: In some societies, saving is regarded as a good social habit, and is thought to be a sensible and correct way of dealing with part of one’s income.

The desire to provide for future needs

Many people save because we live in a world of uncertainty. They wish to build up a reserve of money which will help them cope with any misfortune which may be fall them in the future. People also save to make their years of retirement more comfortable

Saving for particular objective

Some saving is carried out in order to accumulate a sum of money for a particular expensive item

Spending pattern between Richest and poorest households 

The rate of interest

Changes in interest rate may have a number of effects. A rises in the rate of interest may:

a)      Increase savings

b)      Reduce investment

c)       Raise the exchange rate

d)      Discourage spending

e)      Raise firm’s costs

f)       Discourage borrowing

A fall in the rate of interest may:

a)      A decrease saving

b)      Increase investment

c)       Encourage borrowing

d)      Encourage spending

e)      Decrease the exchange rate

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