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
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 2 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 3 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 4 of 15
A disadvantage of strikes for workers is the loss of income during the period of the dispute.
Workers on strike typically do not receive their normal wage, which is a significant personal financial cost of industrial action.
Question 5 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 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
A positive consequence of successful collective bargaining for workers includes strengthened unity and morale.
When workers achieve improvements together, it builds solidarity and morale - making the union stronger for future negotiations.
Question 8 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 9 of 15
A trade union is an organisation that represents employers in wage negotiations.
Trade unions represent workers (employees), not employers. Employers may form their own organisations such as employer associations.
Question 10 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 11 of 15
Higher union membership in manufacturing sectors is one reason why deindustrialisation leads to declining union power.
As manufacturing (which has traditionally high union membership) declines, total union membership falls, reducing overall union power.
Question 12 of 15
Membership fees paid to trade unions increase workers' take-home pay.
Membership fees are a cost to workers - they reduce take-home pay. This is a disadvantage of union membership.
Question 13 of 15
A work-to-rule causes a complete halt to all production.
Work-to-rule slows operations but does not bring them to a complete stop, unlike a strike which halts production entirely.
Question 14 of 15
Larger unions generally have more bargaining power than smaller unions.
A larger membership means the union can threaten more significant disruption, giving it stronger bargaining power in negotiations.
Question 15 of 15
All types of industrial action immediately result in workers losing their wages.
Workers lose wages during a strike but not necessarily during a work-to-rule or overtime ban, where they are still working (just to rule).
Practice
True / False - Workers
20 questionsQuestion 1 of 20
If a key specialised worker leaves, production can be disrupted because replacing them is costly and time-consuming.
Highly specialised workers take time and money to train — their absence creates a vulnerability that is a real disadvantage of division of labour.
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
Many tertiary sector jobs require only minimal training and no qualifications.
Many high-paying tertiary sector roles (doctors, lawyers, accountants) require postgraduate study and professional qualifications — significant human capital investment.
Question 4 of 20
Personal satisfaction from helping others can outweigh monetary compensation for some workers.
Intrinsic motivation — like the satisfaction of helping others in nursing or voluntary work — can be more important than pay for some individuals.
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
Commission is a percentage of the value of sales made.
Commission-based pay rewards sales performance — for example, a real estate agent receiving 1% of every property they sell.
Question 7 of 20
Private sector workers generally have less job security than public sector workers.
Private firms face market pressures and may downsize rapidly during downturns — as seen with Citibank and JP Morgan during the 2008 financial crisis, where mass redundancies occurred.
Question 8 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.
Question 9 of 20
Regional disparities in job availability can cause geographical immobility problems.
When jobs are concentrated in one region but workers are in another, regional imbalances arise — geographical immobility prevents labour from moving to where it is needed.
Question 10 of 20
Specialisation of labour occurs when a worker becomes an expert in a particular profession.
Specialisation means a worker focuses on and masters a specific role — for example, a landscape architect or electrical engineer who develops deep expertise in their field.
Question 11 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 12 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 13 of 20
A wage is a time-based payment made hourly, daily, or weekly.
Wages are calculated by multiplying the number of hours worked by the hourly rate — for example, a part-time worker earning $7 per hour.
Question 14 of 20
The individual labour supply curve is always upward-sloping at all wage levels.
At high wage levels, the supply curve can bend backwards — workers may choose to work fewer hours and enjoy more leisure as they become wealthier (the backward-bending supply curve).
Question 15 of 20
A minimum wage has no effect on the level of unemployment in an economy.
If set above the equilibrium, a minimum wage reduces the quantity of labour demanded — potentially increasing unemployment, particularly for low-skilled workers.
Question 16 of 20
Fringe benefits are monetary payments paid in addition to the basic wage.
Fringe benefits are non-monetary rewards with monetary value — such as pensions, health insurance, company cars, laptops, and education support for children.
Question 17 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 18 of 20
Education, trade union membership, and experience are all factors that influence a worker's relative bargaining power.
All three are listed in the syllabus as determinants of bargaining power — together they determine how effectively a worker can negotiate wages above the equilibrium.
Question 19 of 20
Share options are typically offered to employees of public limited companies.
PLCs have publicly traded shares — offering employees shares or share options is a common incentive in public companies to align worker and shareholder interests.
Question 20 of 20
A fixed monthly payment regardless of workload is called piece rate.
A fixed monthly payment regardless of workload is a salary — piece rate varies directly with output (payment per unit produced).