Households – Spending, Saving and Borrowing
Use the expandable map to revise how households decide what to spend, save and borrow.
Interactive Mind Map
Click a box to expand the detail notes.
- Disposable income is income left after direct taxes have been paid.
- Spending changes when income, confidence, prices and interest rates change.
- Low-income households spend a higher share on necessities; high-income households can spend more on luxuries.
Income
Higher income usually increases spending because households can afford more goods and services. Lower income forces households to cut back or choose cheaper substitutes.
Confidence
When households feel secure about jobs and future income, they are more willing to spend. If confidence falls, they delay purchases and save more.
Prices and inflation
Rising prices reduce purchasing power. Households may buy less, switch to cheaper products, or spend a larger share of income on essentials.
Interest rates
Higher interest rates make borrowing more expensive and saving more rewarding, so spending may fall. Lower rates can encourage borrowing and spending.
- People save for emergencies, major purchases, education, holidays and retirement.
- Saving is affected by income, interest rates, confidence and access to saving products.
- The opportunity cost of saving is current consumption given up today.
Precautionary saving
Households may save to protect themselves from unexpected events such as illness, job loss or urgent repairs.
Future goals
Savings can fund long-term goals such as retirement, school fees, university, a house deposit or a holiday.
Interest as a reward
When interest rates rise, saving becomes more attractive because households earn a higher return on money kept in banks.
Income level
Higher-income households are usually able to save more. Low-income households may struggle to save because most income is needed for basic spending.
- Households borrow to buy expensive items such as houses, cars or appliances.
- Borrowing rises when credit is available, interest rates are low and households feel confident.
- Borrowing has risks because repayments reduce future disposable income.
Cost of borrowing
Interest is the price of borrowing. If interest rates rise, monthly repayments become more expensive and households may borrow less.
Availability of credit
Banks lend more when they are confident borrowers can repay. If lending rules tighten, households find it harder to borrow.
Consumer confidence
Confident households are more likely to take loans because they expect stable income. Uncertainty makes borrowing feel risky.
Wealth and collateral
Households with assets or stable incomes can often borrow more easily because lenders see them as lower risk.
- Spending now means less saving for the future.
- Saving now means giving up some current consumption.
- Borrowing now increases current spending but creates future repayment pressure.
Short run vs long run
A household may borrow or spend more today to improve living standards, but this can reduce future income because repayments must be made.
Economic conditions
During growth, households may spend and borrow more. During recessions, they often save more and reduce risky spending.
Exam link
When explaining household decisions, link the factor to the effect on spending, saving or borrowing, then explain the consequence for the household.
True / False
Select True or False for each statement.
Disposable income is income left after direct taxes have been paid.
Higher interest rates usually make saving less attractive.
Households may borrow to buy expensive items such as houses or cars.
Saving has no opportunity cost because money is kept for the future.
Consumer confidence can affect household spending and borrowing.
Practice Questions
CIE IGCSE ECONOMICS NOTES
3.0 Microeconomic Decision Makers
Practice
True / False - Trade Unions
15 questionsQuestion 1 of 15
Strong trade union activity can reduce a country's international competitiveness if it forces wages above the market level.
Higher wage demands increase production costs, making goods more expensive - this can reduce a country's ability to compete internationally.
Question 2 of 15
White-collar unions represent workers such as teachers and office staff.
White-collar unions specifically represent professional and office-based employees - teachers, nurses, and clerical workers are common examples.
Question 3 of 15
Industrial action such as strikes can disrupt production and reduce a firm's output.
When workers strike, production halts or slows significantly, causing losses for the firm through disruption of operations and supply chains.
Question 4 of 15
Government laws that restrict union activity can weaken a trade union.
Government policies directly affect union strength. Laws restricting strikes or limiting collective bargaining reduce union effectiveness.
Question 5 of 15
Trade unions always successfully achieve their wage demands.
The outcome of negotiations is uncertain. Factors like union strength, economic conditions, and employer resources all affect whether demands are met.
Question 6 of 15
Firms always prefer to deal with trade unions rather than individual workers.
Some firms prefer to avoid unions as they reduce managerial flexibility and can push up wages. It depends on the firm and context.
Question 7 of 15
When a trade union successfully negotiates a large pay increase, the government is always pleased with this outcome.
Large pay increases can contribute to inflation and conflict with the government's aim of price stability, so governments may not welcome significant wage rises.
Question 8 of 15
One consequence of a strike for the wider economy can be an economic slowdown in critical sectors.
If a strike affects a key industry (e.g., transport, energy), it can slow down the whole economy and affect many other businesses.
Question 9 of 15
If a company's profits increase, a trade union is likely to argue for a wage increase.
Unions argue that if workers contributed to higher profits, they deserve a fair share. Increased company profits are a factor supporting higher wage demands.
Question 10 of 15
Trade unions have no impact on inflation.
Wage increases negotiated by unions can raise firms' costs, which may be passed on as higher prices - contributing to cost-push inflation.
Question 11 of 15
Trade unions can help reduce the chance of workers being discriminated against in the workplace.
Unions advocate for equal treatment and can pursue cases of discrimination on behalf of members - protecting workers from unfair treatment.
Question 12 of 15
Industrial action is the first step a trade union takes when collective bargaining breaks down.
Industrial action is a last resort. Unions typically attempt further negotiation or mediation before resorting to strikes or other action.
Question 13 of 15
Rising prices (inflation) strengthen a union's case for a wage increase.
When inflation is high, workers' real wages fall. This gives unions a strong argument that wages must rise to maintain purchasing power.
Question 14 of 15
The growth of the gig economy and zero-hours contracts tends to increase trade union membership.
Gig workers and zero-hours contract employees are less likely to organise and join unions, which generally reduces union membership levels.
Question 15 of 15
Members of a trade union pay a subscription fee to join.
A subscription fee (membership fee) is how trade unions are funded and is a defining feature of union membership.
Practice
True / False - Workers
20 questionsQuestion 1 of 20
During an economic recession, the demand for labour typically falls.
In a recession, demand for goods and services falls — so firms need fewer workers to produce them, reducing the derived demand for labour.
Question 2 of 20
Profit-related pay is an additional payment based on the firm's profit.
Profit-related pay links worker remuneration to firm performance — e.g. partners in a law firm receiving 15% of annual profits.
Question 3 of 20
Profit-related pay aligns the interests of workers with the long-term success of the firm.
When workers share in profits, they have a direct financial incentive to help the firm succeed — encouraging effort, loyalty, and productivity.
Question 4 of 20
The wage rate in a labour market is determined solely by the government.
In most markets, wages are determined by the interaction of demand and supply of labour. Governments influence wages through minimum wage laws, but do not set all wages.
Question 5 of 20
Voluntary work and roles in non-profit organisations are examples where personal satisfaction may outweigh pay.
Many people work for charities or volunteer despite low or zero pay because the personal fulfilment and sense of purpose outweigh the financial sacrifice.
Question 6 of 20
The demand curve for labour is upward-sloping.
The demand curve for labour is downward-sloping — as the wage rate falls, firms are willing and able to employ more workers.
Question 7 of 20
Motivational practices that enhance worker output reduce the demand for labour.
Higher motivation raises productivity — making each worker more valuable and increasing demand for labour, not reducing it.
Question 8 of 20
Occupational mobility refers to the ability to switch between different types of jobs.
Workers who are occupationally mobile can retrain and move between industries — reducing structural unemployment when old industries decline.
Question 9 of 20
The equilibrium wage rate is where the demand for labour equals the supply of labour.
Just like any market, the wage rate settles at the point where the quantity of labour demanded by firms equals the quantity supplied by workers.
Question 10 of 20
Piece rate pay is calculated as a percentage of sales made.
Piece rate is payment per item produced or sold — e.g. $2 per garment made. Commission is the percentage of sales value — e.g. 1% of each property sold.
Question 11 of 20
Stronger trade unions with larger memberships can secure better pay for their members.
A larger union membership increases the collective bargaining power — a bigger strike threat means employers are more likely to concede wage demands.
Question 12 of 20
The level of challenge in a job is a non-wage factor that can affect occupational choice.
Jobs that require problem-solving and creativity provide mental stimulation and long-term satisfaction — influencing whether workers find them fulfilling.
Question 13 of 20
A national minimum wage sets the lowest legal pay rate for workers.
The minimum wage is a price floor in the labour market — firms cannot legally pay workers below this rate.
Question 14 of 20
Changing social attitudes, such as increased female participation, affect the composition of the workforce.
As social norms evolve — e.g. more women pursuing careers — the labour supply increases and becomes more diverse.
Question 15 of 20
Jobs in non-profit organisations are always unattractive to workers because of lower pay.
Many workers are drawn to non-profit roles because of the personal satisfaction, sense of purpose, and impact — non-wage factors can make such roles highly attractive despite lower pay.
Question 16 of 20
If technology makes workers more productive, firms will always reduce their workforce.
Higher productivity may increase demand for labour if output rises significantly. Firms may reduce some roles but expand others — the net effect depends on the scale of production growth.
Question 17 of 20
A shift in either labour demand or labour supply will alter the equilibrium wage rate and employment level.
Any change in the factors affecting demand or supply of labour — productivity, economic growth, population changes — shifts the curves and changes the equilibrium.
Question 18 of 20
Over-dependence on specialised workers is an advantage of division of labour.
Over-dependence is a disadvantage — if a key specialised worker is absent or leaves, production can be seriously disrupted because others cannot easily replace them.
Question 19 of 20
The demand for labour is a derived demand.
Labour is not demanded for its own sake — it is demanded because of the goods and services it produces. Bakers are demanded because of the bread they make.
Question 20 of 20
Pensions, health insurance, and company cars are examples of fringe benefits.
These are non-cash benefits provided by employers that have financial value — they form part of the overall compensation package beyond the basic wage or salary.