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 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 2 of 15
Trade union membership is compulsory for all workers in the UK.
Joining a trade union is voluntary. Closed shops (where union membership was compulsory) were made illegal in many countries including the UK.
Question 3 of 15
Workers in trade unions are less likely to be discriminated against or exploited.
Unions protect workers' rights, making discrimination and exploitation less likely by holding employers accountable.
Question 4 of 15
Trade union members are always free to ignore union decisions if they disagree.
A disadvantage of union membership is that members must usually abide by the majority decision, even if it does not align with their personal preferences.
Question 5 of 15
A positive outcome of successful collective bargaining includes improved wages and working conditions for workers.
Securing better pay, benefits, and working conditions is the primary goal and positive consequence of successful collective bargaining.
Question 6 of 15
Industrial action can result in financial losses for firms even if the action only lasts a short time.
Even brief disruption can cause significant financial damage through lost orders, reputational harm, and supply chain problems.
Question 7 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 8 of 15
Government laws supporting union activity will increase a union's bargaining power.
Legislation that protects the right to strike or makes it easier to organise increases union strength and effectiveness.
Question 9 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 10 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 11 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 12 of 15
An overtime ban can disrupt production particularly during peak periods or when deadlines are approaching.
Firms often rely on overtime to meet high demand. An overtime ban is especially disruptive during busy times.
Question 13 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 14 of 15
The threat of industrial action alone can sometimes persuade employers to negotiate better terms.
Employers may prefer to negotiate to avoid the costs and disruption of a strike, even without the action actually taking place.
Question 15 of 15
An industrial union covers all workers in a particular industry, regardless of their skill level.
Industrial unions represent everyone in an industry (e.g., all oil industry workers), unlike craft unions which focus on a specific skill.
Practice
True / False - Workers
20 questionsQuestion 1 of 20
Recognition in the job — such as praise from management — can make workers feel more satisfied and motivated.
Intrinsic rewards like appreciation and acknowledgement fulfil psychological needs — workers who feel valued tend to be more engaged and productive.
Question 2 of 20
Private sector workers can potentially earn higher wages and bonuses than public sector workers.
The private sector offers performance-related bonuses and profit-sharing — investment bankers, for example, can earn very high total compensation packages.
Question 3 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 4 of 20
A young, inexperienced worker typically has less bargaining power than an experienced senior employee.
Inexperienced workers have fewer skills and are more replaceable — reducing their ability to negotiate pay above the market rate.
Question 5 of 20
The level of danger associated with a job is a non-wage factor.
Firefighters and construction workers face higher physical risks than office workers — the risk level affects job attractiveness and often justifies compensating wage differentials.
Question 6 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 7 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 8 of 20
Workers who value work-life balance may prefer jobs with flexible hours over higher-paying rigid roles.
Flexibility is a non-wage factor — for workers with caregiving responsibilities or personal priorities, flexible hours may be more valuable than additional pay.
Question 9 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 10 of 20
High housing costs in prosperous regions can restrict geographical mobility of labour.
If workers cannot afford to live where the jobs are, they cannot relocate — housing costs are a key barrier to geographical mobility.
Question 11 of 20
Occupational mobility depends on retraining costs and the duration of retraining needed.
Workers can only switch occupations if retraining is accessible and affordable — high retraining costs or long durations reduce occupational mobility.
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
Unskilled workers earn less because their jobs are more abundant and require fewer qualifications.
Unskilled roles are easy to fill — many people qualify, increasing labour supply and reducing wages. The lack of barriers to entry keeps wages low.
Question 14 of 20
A factory worker performing the same assembly task each day is an example of division of labour.
The production process in a factory is broken into specialised tasks — this is the classic example of division of labour that Adam Smith described.
Question 15 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 16 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 17 of 20
The demand for labour depends only on the wage rate and nothing else.
Labour demand is influenced by the wage rate, productivity of workers, level of demand in the economy, and the cost and availability of machinery — not wage alone.
Question 18 of 20
Specialisation of labour and division of labour mean exactly the same thing.
Specialisation refers to a worker becoming an expert in a profession. Division of labour refers to splitting a production process into tasks assigned to different workers — related but distinct concepts.
Question 19 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 20 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.