3.2 Households

2026 Syllabus Objectives

3.2.1 — The influences on spending, saving and borrowing You need to understand what affects how much households spend, save, and borrow — including income, interest rates, and confidence — and how these patterns differ between households and change over time.

What is a Household?

https://cambridgeassistant.com

In economics, a household means one person or a group of people (like a family) who live together and make financial decisions together. Households are important economic agents — they earn income, spend money on goods and services, save for the future, and sometimes borrow money.

Every household must decide what to do with its disposable income (the money left after paying taxes). It can either be spent or saved. Sometimes, households also borrow extra money to fund larger purchases.

Part 1: Spending (Consumption)

https://cambridgeassistant.com

Spending (also called consumption) is the money households use to buy goods and services — things like food, clothes, phones, and transport.

Factors That Influence Spending

1. Disposable Income

  • Disposable income = your salary/wages minus the taxes you pay to the government.
  • Simply put: it is the money you actually have to spend after the government takes its share.
  • The rule is straightforward: when disposable income goes up, spending tends to go up too. When disposable income falls, spending falls.
  • Very low-income households may spend all of their income just on basic necessities like food and shelter, leaving nothing to save.

Formula: Disposable Income = Salary − Taxes

2. Wealth

  • Wealth is everything you own (called assets — e.g. a house, car, gold, savings) minus everything you owe (called liabilities — e.g. loans, mortgage debt).
  • Formula: Wealth = Assets − Liabilities
  • Wealth and spending are connected through the wealth effect:
    • Positive wealth effect: When the value of your assets rises (e.g. your house becomes worth more), you feel richer and more confident, so you tend to spend more.
    • Negative wealth effect: When asset values fall (e.g. share prices crash), you feel less secure and spend less.
  • Wealth can also generate extra income (e.g. dividends from company shares, rent from property), which further boosts spending ability.

3. Interest Rates

  • Interest rates are the cost of borrowing money, or the reward you get for saving.
  • When interest rates rise:
    • Borrowing becomes more expensive, so people take fewer loans → less spending.
    • People who already have loans (e.g. a mortgage) must pay more each month → less money left to spend.
  • When interest rates fall:
    • Borrowing becomes cheaper → people take more loans → more spending.
    • Monthly loan repayments shrink → more money left to spend.

4. Inflation

  • Inflation is a general, persistent rise in the prices of goods and services.
  • When inflation is high, the same amount of money buys fewer goods — this is called a fall in purchasing power.
  • Higher prices → households can afford less → spending tends to fall (in terms of quantity of goods bought).
  • Inflation also erodes the real value of savings, making people feel less wealthy.

5. Confidence Levels

  • Consumer confidence is how optimistic or pessimistic people feel about the economy and their own financial future.
  • When confidence is high (e.g. during an economic boom):
    • People feel secure in their jobs and expect their income to continue → they spend more, including on luxuries.
  • When confidence is low (e.g. during a recession — when the economy is shrinking):
    • People fear job losses or pay cuts → they cut back on spending and hold on to their money.

6. Age and Size of the Household

  • Young people tend to spend most of their income on lifestyle choices — socialising, clothes, technology.
  • Middle-aged people typically earn more and start saving for retirement, but also spend on family needs.
  • Retired people often "dis-save" — they spend their previously saved money because they no longer receive a regular wage.
  • Larger households (more people) generally spend more in total than smaller households, because there are more mouths to feed and more needs to meet.

7. Culture of the Country

  • Cultural values shape spending habits. In societies where consumerism (the idea that buying things is important and desirable) is strong, households tend to spend a high proportion of their income.
  • In societies that value thrift (being careful with money), households tend to spend less and save more.

Sign in to view full notes