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
A craft union is an example of a narrow, skill-based union — such as one representing only electricians.
Craft unions are defined by their focus on one specific skilled trade or occupation.
Question 2 of 15
Higher wages secured by unions always benefit firms by reducing their costs.
Higher wages negotiated by unions increase firms' costs, potentially reducing competitiveness and profits.
Question 3 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 4 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 5 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 6 of 15
An overtime ban is a milder form of industrial action compared to a full strike.
An overtime ban restricts additional hours but still allows normal work to continue, making it less damaging (and less risky for workers) than a full strike.
Question 7 of 15
General unions are the most narrowly focused type of trade union.
General unions are the broadest type — they accept workers from all occupations. Craft unions are the most narrowly focused.
Question 8 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 9 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 10 of 15
Firms benefit from trade unions because union-negotiated agreements always increase worker productivity.
There is no guarantee that agreements increase productivity. However, fairer treatment and improved motivation may lead to higher productivity over time.
Question 11 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).
Question 12 of 15
Workers with rare skills have stronger individual bargaining power, which may reduce their need for a trade union.
If a worker has unique or scarce skills, they can negotiate individually from a position of strength. Workers with common skills benefit more from collective bargaining.
Question 13 of 15
When unemployment is high, trade unions tend to have less bargaining power.
High unemployment means there are many workers available to replace strikers, weakening the union's threat and therefore its bargaining position.
Question 14 of 15
Strikes can lead to a disruption of production and supply chains.
When workers strike, not only is production halted but supply chains that depend on that output are also disrupted.
Question 15 of 15
Collective bargaining is when individual workers negotiate their own wages directly with management.
Collective bargaining involves the trade union negotiating on behalf of all workers as a group, which is more effective than individual bargaining.
Practice
True / False - Workers
20 questionsQuestion 1 of 20
The length of training required has no effect on occupational choice.
Training requirements significantly influence choice — some workers prefer roles requiring minimal training, while others invest years in preparation (e.g., surgeons, pilots) for higher future rewards.
Question 2 of 20
Greater job security and better pensions are advantages of working in the public sector.
Public sector employment is less volatile than private sector — workers are less likely to be made redundant and typically receive defined-benefit pensions.
Question 3 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 4 of 20
Geographical mobility of labour refers to the ability and willingness of workers to move to different locations for work.
Geographically mobile workers can respond to job opportunities in different regions or countries — helping to reduce regional unemployment and skill shortages.
Question 5 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 6 of 20
Skilled workers earn higher wages due to higher demand and lower supply.
Skilled workers have specialised training and qualifications that are in high demand but short supply — giving them strong bargaining power and justifying higher wages.
Question 7 of 20
An electrical engineer becoming an expert in their field is an example of specialisation of labour.
Developing deep expertise in a specific profession — rather than being a generalist — is the definition of labour specialisation.
Question 8 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 9 of 20
High welfare benefits may discourage some people from seeking employment.
If welfare payments are generous, the financial gain from working may be small — reducing the incentive to enter the labour market.
Question 10 of 20
More experienced workers typically earn higher wages than less experienced workers.
Experience increases a worker's productivity and value to employers — creating stronger individual bargaining power and justifying higher pay.
Question 11 of 20
Agriculture, fishing, and forestry are examples of primary sector industries.
The primary sector involves extraction of raw materials from the natural environment — farming, fishing, and forestry are the classic examples.
Question 12 of 20
A worker switching from being a coal miner to a software developer is an example of high occupational mobility.
Moving between very different industries requires significant retraining — this illustrates both the possibility and the challenge of occupational mobility.
Question 13 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 14 of 20
One advantage of a minimum wage is that it ensures fair wages and reduces exploitation of low-paid workers.
Without a minimum wage floor, some employers could pay very low wages — the minimum wage protects the most vulnerable workers from exploitation.
Question 15 of 20
Geographical mobility can be restricted by factors such as family ties, cost of living, and regional disparities.
Even if jobs are available elsewhere, workers may be unable or unwilling to move due to personal commitments, housing costs, or cultural ties.
Question 16 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 17 of 20
If labour supply increases while demand remains unchanged, the equilibrium wage rate will fall.
More workers available at the existing wage creates a surplus — wages are bid down until the market clears at a lower equilibrium wage.
Question 18 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 19 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 20 of 20
Jobs requiring postgraduate education (e.g., architects, professors) require higher levels of education as a non-wage consideration.
The education required is a non-wage factor — workers must invest significantly before entering the profession, which affects their occupational decision.