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
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 2 of 15
All four types of unions - craft, industrial, white-collar, and general - use collective bargaining.
Collective bargaining is the central method used by all types of trade unions, regardless of which workers they represent.
Question 3 of 15
The growth of self-employment and part-time work tends to increase trade union membership.
Self-employed and part-time workers are less likely to join unions, which tends to reduce overall union membership.
Question 4 of 15
Trade unions can cause inflation by securing wage increases that push up firms' costs.
If unions secure large wage increases, firms' production costs rise. These costs may be passed on to consumers as higher prices - cost-push inflation.
Question 5 of 15
Collective bargaining ensures workers have a collective voice, making negotiations more effective than individual efforts.
This is one of the fundamental reasons trade unions exist - the collective voice is far more powerful than any individual worker's voice alone.
Question 6 of 15
A trade union's main purpose is to maximise profits for its members.
Trade unions aim to protect workers' rights and improve pay, working conditions, and benefits - profit maximisation is the goal of firms, not unions.
Question 7 of 15
Craft unions accept workers from all types of jobs.
Craft unions represent workers with a specific skill or trade, such as carpenters or plumbers. General unions accept workers from all jobs.
Question 8 of 15
Collective bargaining is only possible when a trade union is very large.
Any recognised trade union can engage in collective bargaining, regardless of size - though larger unions tend to have more power.
Question 9 of 15
A trade union can help improve communication between workers and management.
Unions act as a formal channel between employees and employers, improving industrial relations and communication.
Question 10 of 15
Higher worker productivity weakens a union's case for a pay rise.
Higher productivity actually strengthens the union's case - if workers are producing more, they can argue they deserve higher pay as reward for their contribution.
Question 11 of 15
One role of a trade union is to lobby the government for worker-friendly policies such as a higher minimum wage.
Lobbying government is a key role — unions push for policies like minimum wage increases and better pension rights.
Question 12 of 15
Industrial action is designed to pressure employers into negotiating more favourable terms for workers.
The purpose of industrial action is to highlight the importance of workers while putting pressure on employers to agree to better pay or conditions.
Question 13 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 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
A trade union representing workers in the oil industry is an example of a general union.
A union covering all workers in the oil industry is an industrial union. A general union covers workers across many different industries.
Practice
True / False - Workers
20 questionsQuestion 1 of 20
A bonus is a lump-sum payment based on performance.
Bonuses are one-off payments rewarding good performance — for example, bank managers receiving end-of-year bonuses tied to the firm's profits.
Question 2 of 20
A minimum wage can encourage employment by making work more financially attractive than welfare benefits.
Higher pay makes taking a job more worthwhile — reducing welfare dependency and increasing labour force participation.
Question 3 of 20
A minimum wage boosts consumption because low-income earners have more disposable income.
Low earners have a high marginal propensity to consume — higher wages mean they spend more, stimulating aggregate demand and economic activity.
Question 4 of 20
Commission-based pay incentivises workers to maximise their sales performance.
Since earnings depend directly on sales, commission motivates workers to sell as much as possible — aligning their financial interests with the firm's revenue goals.
Question 5 of 20
A real estate agent receiving 1% of each property sold is an example of piece rate pay.
This is commission — a percentage of the sales value. Piece rate is payment per unit produced, not a percentage of value.
Question 6 of 20
Division of labour only benefits workers, not firms.
Both workers and firms benefit — workers gain expertise and potentially higher wages; firms gain higher output, efficiency, and competitiveness.
Question 7 of 20
If the demand for a product falls, the derived demand for the labour that produces it also falls.
Since labour demand derives from product demand, a fall in sales reduces the need for workers — the two are directly linked.
Question 8 of 20
A supermarket checkout operator is an example of division of labour.
The checkout operator performs one specific task within a larger retail process — a clear example of a production process split into specialised tasks.
Question 9 of 20
Non-wage factors are often more influential in the long term as they affect job satisfaction and personal well-being.
While wages attract workers initially, non-wage factors — challenge, recognition, career prospects — determine long-term satisfaction and retention.
Question 10 of 20
Wage factors are often more influential than non-wage factors in determining long-term job satisfaction.
Non-wage factors are often more influential in the long term — job satisfaction, career prospects, and personal fulfilment matter more to workers over time than pay alone.
Question 11 of 20
The labour force participation rate refers to the percentage of the working-age population actively working or seeking work.
This is the definition — it measures what proportion of the potential workforce is economically active (employed or unemployed and job-seeking).
Question 12 of 20
Women's average wages are lower than men's due to factors including higher part-time participation and career breaks.
The gender pay gap reflects structural factors — women are more likely to work part-time, take career breaks for childcare, and face workplace discrimination.
Question 13 of 20
When the wage rate falls, the number of workers demanded by firms increases.
Lower wage costs make it cheaper to employ labour — so firms demand more workers when wages fall, consistent with the downward-sloping demand curve.
Question 14 of 20
During economic growth, the demand for labour typically increases.
Economic growth raises demand for goods and services — firms need more workers to produce them, shifting the labour demand curve outward.
Question 15 of 20
Geographical mobility refers to the ability and willingness of workers to relocate for work.
Workers who are geographically mobile can move to areas where jobs are available — helping to reduce regional unemployment imbalances.
Question 16 of 20
The use of robots in car manufacturing is an example of labour being replaced by technology.
Automation in car plants replaces many assembly-line workers — reducing the demand for labour while increasing output and efficiency.
Question 17 of 20
Trade unions can influence the equilibrium wage rate by bargaining for higher wages on behalf of workers.
Unions act as a collective voice — by negotiating wages above the market equilibrium, they can raise pay, though this may reduce employment.
Question 18 of 20
A minimum wage set above the equilibrium wage will reduce the quantity of labour demanded by firms.
Higher labour costs make it more expensive for firms to employ workers — so they hire fewer, reducing employment levels.
Question 19 of 20
Higher education levels have no correlation with earnings potential.
Higher education correlates strongly with better earnings — graduates and postgraduates command higher wages because their skills are more valuable and in shorter supply.
Question 20 of 20
A key disadvantage of division of labour is that work can become repetitive and boring.
When workers perform the same narrow task repeatedly, work loses variety — leading to boredom, disengagement, and potentially lower motivation.