IGCSE | Economics | Notes | Unit 3
The individual as producer, consumer and borrower
1. Specialisation Advantage & Disadvantage
2. Trade Union
3. Money Functions and Characteristics
4. Banking, Stock Exchange
5. Occupation and Wages
6. Consumers Spending & Savings

Unit 3: The Individual As Producer, Consumer and Borrower

1. Specialisation Advantage & Disadvantage

What is Specialisation?

Through years, production has developed into a complicated process and thus broken down into a series of highly specialised task. Each task is then performed by a worker. This is known as Division of Labour.

Advantages of Division of Labour

Practise makes perfect: Worker specialises in a particular task and gives in the best, thus producing goods faster and less wastage of material. (FASTER)

  • Use of machinery: Specialised machinery can be used which is further increase the productivity.
  • Increased Output: with improvement in efficiency and use of machinery output is increased.
  • Saves time: There is no time wasted in switching of jobs and thus the momentum of production can be maintained which leads to less wastage of time.

Disadvantages of Division of Labour

  • Boredom: Performing the same task over and over again may lead to boredom for the workers.
  • Lack of variety: Though the number of goods produced increases but they are identical or standardized.
  • Low motivation for worker: Repeatedly performing the same task may lead to low motivation level for the worker. The worker might not have the sense of fulfilling a complete task as he is performing only a part of the job.
Lack of mobility: Due to specialisation workers might find it difficult to switch between occupations.

 

2. Trade Union

Q. What is a Trade Union?

A trade union or labour union is an organization of workers who have banded together to achieve common goals in key areas such as wages, hours, and working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with employers. This may include the negotiation of wages, work rules, complaint procedures, rules governing hiring, firing and promotion of workers, benefits, workplace safety and policies.

Q. Why do workers join trade unions?

Workers might join a trade union because

  • They believe that there is strength in number and they will be listened to when they in a group.
  • To negotiate a better pay, more holidays and less hours of work.
  • To pressurise the employer to provide them with a healthier and safer working environment.
  • Improved benefits for retrenched workers
  • To get the benefits of advice, financial support and welfare activities carried out by Trade Unions.
  • Many workers may also join a trade union because there is a closed shop policy.
  • Sometimes they provide legal assistance to their members if required
  • They provide some social welfare for their members like free edu. for their children, social and cultural programmes to distress the workers, etc…
  • They protest against unfair partiality.

Q. Explain the functions of Trade Union?

A trade union is an organization which represents the interest of its workers in negotiations about improving working conditions with employers and government. This includes negotiation of wages, work rules, complaint procedures, rules governing hiring, firing and promotion of workers, benefits, workplace safety and policies. The agreements negotiated by the union leaders are binding on the rank and file members and the employer and in some cases on other non-member workers.
objectives and activities of trade unions

  • Provision of benefits to members:    Trade unions  often provided a range of benefits to insure members against unemployment ill health, old age and funeral expenses. In many developed countries, these functions have been assumed by the state; however, the provision of professional training, legal advice and representation for members is still an important benefit of trade union membership.
  • Collective bargaining: Where trade unions are able to operate openly and are recognized by employers, they may negotiate with employers over wages and working conditions.
  • Industrial action: Trade unions may organize strikes or resistance to lockouts in furtherance of particular goals.
  • Political activity: Trade unions may promote legislation favorable to the interests of their members or workers as a whole. To this end they may pursue campaigns, undertake lobbying, or financially support individual candidates or parties (such as the labour party in Britain) for public office.


Q. Explain various industrial actions taken by trade union.

Industrial action

The majority of worker-to-manager and therefore union-to-employer problems are worked out peacefully through negotiation. However occasionally an issues arises where no agreement or solution can be reached. This is when a trade union may conduct some form of industrial action in order to force the employer to back down.
There are several different types of industrial action that could be taken:

    • Strike – Workers select a day(s) on which they will not come into work.
    • Work to rule – Workers apply the firm’s rules and procedures to the ‘letter’ with the objective of slowing down production. For example a machine worker may be told to ensure his machine is clean and safe before starting work and so he will be deliberately nit-picking and spend hours doing exactly this.
    • Go slow – Employees carry on working but at the minimum pace possible in order to slow down production but avoid disciplinary action.
    • Picketing – Workers may stand at the entrance to the employer’s factory or place of work and demonstrate with banners or slogans.
    • Overtime ban – Workers simply refuse to work overtime as they are not obliged to. This can prevent a firm being able to produce quickly enough to meet demand and they may lose orders.

     

     

    3. Money Functions and Characteristics

    What is money?

    Money is anything that is generally acceptable as a means of exchange. Anything could be used as money providing there was a general acceptance that it could be used to acquire the things we need. At this moment in time we use bits of paper and metal (notes and coins). We all accept that if you are offered a £10 pound note for an object you are willing to sell (assuming it is the right value) then it would be acceptable because you know you could then use that very same note to buy the things you wanted from someone else. This is why, in the past, all manner of items have been used as money - cigarettes, shells, etc.
    However, this does not mean that every system of money is a good system. To be a 'good' money system, it has to have a number of characteristics. The closer the system is to all these characteristics the better the system. The important point with any money system is to remember that we are interested in what the money can actually buy rather than the means by which we acquire goods and services. In modern society, the use of notes and coins as the means of exchange is decreasing as we find other methods of acquiring what we need. Notably 'plastic' in the form of credit and debit cards. Does this mean they are a form of money? Look at the characteristics below to decide for yourself whether they meet the definition of 'money'.
    The answer to the question in the title is of course simple - we all do! But why do we need it? What do we need it for? These are more important questions than you may think, because we need to know the answers if we are to have 'sound money'. We therefore need to know the functions of money, in other words the things we need money to be able to do.

    Functions of Money


    • A medium of exchange - probably the most obvious function of money, we need money to be able to spend. We need something that is generally acceptable as a means of payment for goods and services.
    • A store of value - we also want to be able to use money to store our wealth. We want to be able to keep money and spend it in the future as well as the present. If money is to fulfil this function, there must be price stability (low inflation), or money will lose its value over time. In other words we want to be certain (or as certain as possible) that the £10 in our pocket today will buy the same amount of goods and services as £10 in three weeks time, or three months time or even three years time!
    • A unit of account - money has to act as a way for people to measure values of goods and services. We all have different views about the value of things. The ring given to us by a loved one may be very valuable to us personally and may be regarded as 'priceless' This can be overcome to some extent by a common unit of account - we all have some idea of what £10 is worth to us.
    • A standard of deferred payment - money has to be valid for future claims as well as present ones. Firms will want to set the level of wages for the future; they want to be able to pay bills after a period of credit has expired and so on. Money has to act as a way of setting these future payments. I want to know what that the monthly wage I am going to earn will be in six months time - it gives me a standard to measure future payments made and received.

    These functions alone don't tell us what would make a good type of money. As mentioned above, various things have been used as money. So why do we not still use these? What attributes do we need money to have, if it is to be a 'good' form of money?

    Characteristics of good money

    Acceptability - if money is to be an effective medium of exchange, it has to be universally acceptable (or at least acceptable within the country or origin).

    • Divisibility - money has to be able to be conveniently split into multiple units for convenient payment. (Cows might be a useful source of money but they would certainly lose their value if cut up to pay for small items!)
    • Portability / convenience - money has to be convenient to carry around. (Ever tried slipping a cow into your back pocket?)
    • Difficult to counterfeit - a lot of effort goes into ensuring that people cannot easily copy money.
    • Durability - money has to last well if it is to act as a store of value and standard of deferred payment. Your money won't fulfill these functions very well if you end up smoking it or losing it in a card game! There is a real issue with this even with notes and coins - Five pound notes have a short life span because they are used too regularly - how long before we get a five pound coin?
    • Uniformity - money has to be of a uniform quality to ensure that it remains universally acceptable.
    • Limited in supply - if it is to maintain its value, the supply of money has to stay limited. Using leaves as money, for example, would create a money supply problem in the autumn! This last point is the reason why cigarettes have been used as currency in the past - it is because they were limited in supply relative to the demand and therefore had some value!

     

     

    4. Banking, Stock Exchange

    BANKING

    Bank means an institution which receives funds from the public and gives loans and advances to those who need them.

    DIFFERENT TYPES OF BANKS

    Central Banks

    Central Banks are charged with regulating the size of a nation’s money supply, the availability and cost of credit, and the foreign-exchange value of its currency. Regulation of the availability and cost of credit may be designed to influence the distribution of credit among competing uses. The principal objectives of a modern central bank in carrying out these functions are to maintain monetary and credit conditions conducive to a high level of employment and production, a reasonably stable level of domestic prices, and an adequate level of international reserves.

    Function of a Central Bank

    A central bank usually carries out the following responsibilities:

    1. Implementation of monetary policy.
    2. Controls the nation's entire money supply.
    3. The Government's banker and the bankers' bank ("Lender of Last Resort").
    4. Manages the country's foreign exchange and gold reserves and the Government's stock register;
    5. Regulation and supervision of the banking industry
    6. Setting the official interest rates- used to manage both inflation and the country's exchange rate - and ensuring that this rate takes effect via a variety of policy mechanisms

    Functions of Commercial Banks:

    • PRIMARY FUNCTIONS: There are TWO types of primary function of Commercial Banks:
      1. Accepting Deposits:  Commercial Banks accepts deposits from their customers in different forms of Accounts, Like Savings A/C, Current A/C, Recurring A/C etc.
      2. Granting Loans: Commercial Banks grants loan to individuals, business, firms etc for different purpose. Like they provides Industrial Loan, Housing Loan, Personal Loan, Education Loan, Car Loan etc.

    SECONDARY FUNCTIONS: They perform following secondary functions:

    1. Exchange of foreign currency.
    2. Provides safe deposit lockers.
    3. Provide insurance policies.
    4. Pay different types of bills for customers.
    5. They provide credit and debit card facility.
    6. They provide on-line banking and transfer of money.
    7. Provides financial advice to the customers.
    8. Buying and selling of shares.

     

    TYPES OF DEPOSITS :-

    Savings bank deposit :- These deposits are made by those whose main purpose is to save. The commercial bank pays interest to the depositor against his savings deposit. Banks impose restrictions on the number and amounts of withdrawals during a period of time but may relax these rules depending upon other factors.

        • Current account deposits or demand deposits :- These are deposits which can be withdrawn by the depositors at any time that they want. The bank does not pay interest on demand deposits and cheques are used against these deposits. Such type of deposits are kept by businessmen and industrialists who receive and make large payments through banks.
        • Fixed deposits :- The deposits that can be withdrawn after a specified period and carry a higher rate of interest are known as fixed deposits. These deposits are also known as Time deposits and are popular among depositors both for their safety and their interest income.
        • Cumulative deposits :- A person deposits a given amount every month for a period of 25 months or more and the amount accumulates along with the interest. It is a good and profitable form of saving.

    Difference between Central Bank and Commercial bank

    Central Bank

    Commercial Bank

    1. Central Bank is an apex institution in the money market. 1. A commercial bank on the other hand, is merely a unit in the banking structure of the country, operating under the control of central bank.
    2. A country has only one central bank eg. The Bank of England, Reserve Bank of India etc. 2. A country has a large number of commercial banks.
    3. This bank is generally owned and governed by the government. 3. These banks may be owned by government or by the private entrepreneurs.
    4. A central bank does not aim at profit, though it may earn huge profits. 4. Commercial banks treat profit making as their primary objective.
    5.It does not normally deal with general public. 5. Commercial banks deal with general public.
    6. Central bank enjoys the monopoly power to issue currency. 6. Commercial banks do not have power to issue currency.
    7. Central bank controls credit. 7. Commercial banks create credit.
    8. It acts as an agent and a banker to the government. It functions as a custodian of the government’s funds, and gives advise on monetary and fiscal matters. 8. Commercial banks have no advisory responsibility towards the state.

    Markets for Money :-

    1. Savers and borrowers :- Banks and other financial institutions such as building societies, insurance companies and pension funds collect savings from households and firms. These savings are lent to borrowers. Households borrow in order to purchase houses, cars, furniture and so on. Firms borrow to buy machines, transport equipment, materials and so on.

      Banks and other financial institutions are able to attract savings because they offer savers a variety of services such as facilities for withdrawing cash when it is needed, opportunity to earn income in the form of interest etc.
    1. London Money Market :- This is the market for loans whose periods range from a few hours to several months. A variety of banks trade in the London money market, including the bank of England, the discount houses, the merchant banks, the commercial banks and branches of foreign banks.
    1. A bill of exchange : This is an important document which enables traders in both home and overseas markets to obtain credit that is to borrow money.
    1. Treasury bills : These are a type of bill of exchange issued by the British Government and have a life of 91 days and are the means of which the government borrows for a 3month period. They are issued in the denominations ranging from 5000 pounds to 1000,000pounds and are sold to the highest bidders in weekly transactions. Discount houses and other financial institutions buy these bills.

    Banking Services

    1. Receiving deposits : Banks accept deposits which is a safe and convenient way of holding money.
    2. Making payments :-
      1. The cheque system : Each day more than eight million cheques are handled by banks in England and wales. In order to make cheques more acceptable to sellers of  goods and services, the banks provide cheque, guarantee cards or bankers’ cards.
      2. Standing orders : These enable depositors to instruct their banks to make regular payments of fixed amounts. They are very useful for paying such items as rent, rates, insurance premiums, mortgage payments and so on.
      3. Direct debits : Some bills are payable at regular intervals, but the amounts are variable. Examples quarterly bills for electricity, gas and telephone services. Direct debits are instructions to a banker to pay these bills, whatever their amounts when they fall due.
      4. Bank giro credits : This system enables depositors to use only one cheque to pay several bills. A form is filled in to show the names and bank account numbers of all the persons to be paid, and the amounts due to each of them. The bill from the gas, electricity, telephone and water companies and other large enterprises usually have bank giro slips attached to them. These bills can be paid at any bank, either by cash or by cheque.
      5. Credit cards : These plastic cards are now widely used by bank depositors. They enable cardholders to buy goods and services from those shops, restaurants, garages etc. which have joined the scheme, without paying in cash or cheque. Each cardholder is given a limit to his or her total spending, and receives a monthly statement of accounts.
      6. Travellers’ cheques and foreign currency :- For people traveling abroad, and for households and firms making payments to other countries, the banks provide travellers’ cheques and foreign currencies.
      7. Cash dispensers : These machines are set into the outside walls of certain banks and provide bank customers with a 24 hour service for the supply of banknotes. Each bank customer is given a secret code number and a card. By keying in the card and code no. the customer can obtain cash up to some agreed limit.
    3. Making loans :
      1. Bank loans : Banks provide short term loans and also make loans for longer periods of time and for which interest is charged.
      2. Bank overdrafts : This type of lending allows a customer to over draw his or her account by some agreed limit. If a firm is granted an overdraft of $5000, the bank will honor its cheque until its account is $5000 ‘in the red’, that is overdrawn. Interest is only charged on the amount overdrawn.
      3. Bank loans and security : A bank will probably ask a borrower to provide with some kind of security, as evidence of his or her ability to repay the loan. A borrower may be asked to deposit some kind of asset with the bank so that, should he or she fail to repay the loan, the bank may recover its money by selling the asset.
      4. Other bank services : Banks will supply help and advice with the investment of money eg. The purchase of government securities and company shares. They will also act as executors of wills.

    STOCK EXCHANGES

    Meaning :

    Stock exchange is a market place for the buying and selling of shares, debentures and government securities. It is primarily a market in second-hand or existing shares, although some newly-issued shares are placed with dealers on the stock exchange. The main stock exchange in the UK is in London.

    Functions of the stock exchange

    1. It helps the government and companies to borrow on a long term basis :- Most shares carry no date for repayment-they represent permanent loans to companies. Debentures and long-term government securities may not be repayable for many years. Many people are prepared to lend their savings because they want to earn interest and dividends, but they also want to be in a position to get their money back if it should become necessary. The existence of a stock exchange solves this problem because it allows people to sell their shares and other securities at any time. Companies and government are not affected directly by these sales.
    1. It influences the way in which savings are invested :- The stock exchange is a free market and share prices change frequently as the conditions of supply and demand change. The prices of shares in companies which are successful or which are believed to have good prospects will tend to rise as the demand for them increases and vice-versa. These movements in share prices will influence the way in which savings are invested. They will tend to flow to companies whose shares have been rising in price.
    1. It measures shares value : - The price of shares and debentures is determined through stock exchanges.
      The rate of dividend declared by the companies affects the price of their shares and debentures. The price of the shares increases with the increase in the rate of dividend and vice-versa. The price of securities reflect the economic status of the company.
    1. It provides a means of valuing financial assets :- When wealth is held in forms other than money, it is often difficult to measure the value of that wealth. In the case of shares, debentures and government securities which are sold on the stock exchange, however this problem does not arise. The price of these securities are published daily. It is always possible there to find their present value.
    1. Safety to investors :- Securities in the stock exchange are listed after complete scrutiny. It prevents the trading of false and duplicate securities. It also facilitates in the immediate and easy transfer of securities.
    1. Safe dealings :- Stock exchanges strengthen the capital market. They develop justified principles and procedure and compel the industrial concerns to follow it.
    1. Furnishing full information regarding listed companies :- Stock exchanges publish official year book every year. It contains requisite information about the companies whose securities have been listed.
    1. Speculation :- Prices of shares and other securities being traded on the stock exchange change from day to day encourages some people to guess which way these prices will move in the immediate future. These people are speculators, and they hope to make a gain by guessing correctly.  Speculators do not buy shares for the income they yield in the form of dividends; they buy them with the intention of selling them so as to make a capital gain.

    What are the securities traded on the stock exchange

    Only those public companies which have been approved by the stock exchange council can have their shares traded on the stock exchange. These companies are described as listed or quoted companies.

    The types of securities traded on the stock exchange include the following :-

    1. Gilt-edged securities – are securities which are fixed interest securities issued by the British Govt.
    2. Securities issued by local authorities and other public authorities.
    3. Debentures
    4. Preference shares
    5. Ordinary shares as equity shares
    6. Shares which are listed on stock exchanges of other countries.

    Buying and selling of securities on stock exchange

    1. Traditional system : Only members can trade on the stock exchange. These members grouped themselves as firms, which were mainly partnerships. Member firms were of two kinds :- stock brokers and jobbers.

    Stock brokers took orders from clients who wished to buy or sell shares. They carried out these orders on the stock exchange and charged a commission for their services. The stock exchange fixed the minimum commission which stockbrokers could charge for their services.

    Jobbers : They did not deal directly with the public. They operated within the stock exchange and were always prepared to buy shares from or sell shares to stockbrokers. Jobbers acted as wholesalers, buying and selling shares on their own account. They earned income by adjusting their prices according to changes in supply and demand so that, on average, they sold shares at prices higher than those they paid for them.
          

    1. Modern or recent system :
      1. By fixing the minimum commission which a stockbroker could charge for his services, the stock exchange restricted competition. It meant that the more efficient and larger firms of stockbrokers could not capture more business by charging lower fees for their services. Minimum commissions have now been abolished.
      2. The arrangement whereby only jobbers could buy and sell shares on their own account and brokers were restricted to acting as agents for people wanting to buy or sell shares has also been abolished.
      3. The rules which restricted membership and ownership of stock exchange firms have been changed. This will allow larger institutions such as banks to own stock exchange firms.

     

    5. Occupation and Wages

    Factors determining choice of occupation :

    a. Wages or pay scale:

    If an individual gets more pay scale /salary/wages in one occupation than another then he might choose to work there. This is because pay scale is the most important factors for the choice of occupation. This is the only WAGE FACTOR.

    b. Fringe benefits:

    If an individual gets more fringe benefits like free accommodation, free transportation, free medical facilities, free education facility for children, subsidized food etc  in one occupation than another then he might choose to work there. This is because all these factors decides the real wage of a worker.

    c. Number of hours:

    If an individual gets an occupation where wage rate is same as another occupation but working hour is less than the previous job then he might choose to work there. This is because he will have more leisure time that he can spend with his family.  

    d. Location of his working area:

    This factors plays an important role in choosing a worker’s choice of occupation. If the work area is nearby with less pay scales too, some workers may be ready to work as they do not have to travel a long distance.

    e. Opportunities for promotions / Career prospects:

    If a person has more opportunities of being promoted in one company than another, he might choose to work there. This is because of better future job prospect.

    f.  Job security:

    If an individual gets more secured jobs / permanent job than he might prefer to join even if the pay scale is comparatively less than the other one.

    h. Working condition:

    If the working condition is good, safe and secure, hygienic etc then a person might be ready to work for that job then the other job where all these are not available.

    i. Goodwill of the organization:

    Size of company along with goodwill also matters as an individual might prefer to work in a large organization with a good reputation as they can be benefited in different ways & of course it  good  & prestigious  matter of being a part of such organization.

    Q: Why work for low Wages?

    There may be times when a worker would be prepared to work for very low wages?
    The reasons might be

    • The worker might not be able to get another job and has to contend with low wages till he finds a better paying job.
    • Low skilled jobs usually have low wages. The worker might not be trained to do skilled job and thus get low wages.
    • The worker might choose to work part-time and does not mind low pay. For example, a student working doing a part time job to earn his pocket money may not negotiate too much for higher wages.
    • In the same way, a worker might view the job as a temporary measure until a better job is available and may not negotiate for better wages.
    • Lack of information is also an important factor. Workers who do not know of alternative jobs usually land up getting lower wages.
    • Age may be a factor which limits the worker to get higher wages.

     

    Q. Why workers change jobs at same wages?

    There are many times when a worker decides to move to another job at the same rate of pay
    The reasons might be:

    • Sometimes workers move from one job to another at the same rate of pay because their working conditions are not good or acceptable to them and they prefer to change job even though they are not paid more.

    • There may be times when the worker may find problems due to extreme weather conditions or geographical factors.
    • Workers also change jobs in expectation of better prospects of promotion or professional development, though they are not getting higher wages.
    • Many workers might find the journey to work very tiring and would prefer to work close to their homes.
    • Some workers might relocate to a location which they personally like even though they might get the same wages.
    • Working in large company is considered as a status symbol by many workers and they might change job to work in a large company.
    • Many businesses don’t pay high wages but care for their employees by providing Fringe benefits such as subsidised meals, health scheme, leisure activities. This may also influence a worker to move to these businesses.

     

    Q. Why workers in the same occupation paid differently?

    Workers doing the same job within the same industry are paid differently because:

    • Different pay agreements across the country-overtime, bonus.
    • Demand & Supply of labour:
    • Informal economy, where there is no fixed wage policy. ( most important point )
    • Shortage of workers
    • Differences in the amount of experience, training, hard work & productivity. ( most important point )
    • Demand for final product or service( most important point )
    • Likely revenue from sale of good or service.
    • Workers in cities are paid more to meet the higher cost of living.
    • In spite of equal-opportunities women tend to earn less because their careers are interrupted by family commitments, or they suffer from sex discrimination.
    Older workers tend to earn more because of seniority & experience.

     

     

    6. Consumers Spending & Savings

    TYPES OF PERSONAL INCOME

    There are several ways of measuring personal income:

    1. Gross personal income: This is the total personal income from all sources of an individual.
    2. Disposable personal income: This is the amount which remains after income tax and national insurance contributions have been deducted from gross personal income. Disposable personal income = Gross personal income – Income Tax & NI contribution.
    3. Real disposable personal income: This refers to the quantity of goods & services which disposable income can buy. It is the purchasing power of money income.

     

    WHY DO PEOPLE SAVE?

    People save money because:              

    1. It is good social attitude.
    2. It is helpful for future.
    3. For any particular objective.
    4. For security purpose.
    5. Of increasing disposable income.
    6. High rate of interest attract to save more.
    7. They are attracted by different saving schemes.

     

    FACTORS INFLUENCE CONSUMER SPENDING

    1. Increase in real income ( more real income more spending )
    2. Amount of wealth held ( more wealth held more spending )
    3. Easy borrowing ( easy borrowing, easy spending )
    4. Hire-purchase facilities ( easy installments, more spending )
    5. Rate of interest ( low rate of interest more spending )
    6. Changes in the rate of income tax ( decrease rate of interest, more spending)
    7. Changes in the distribution of income ( lower income household spend a greater proportion of their income then higher income households )

    Changes in interest rate may have a number of effect.

    A rise in the rate of interest may:

    1. Increase savings
    2. Discourage spending
    3. Reduce investment.
    4. Raise firms’ cost of production.
    5. Raise the exchange rate.
    6. Discourage  borrowing.

    A fall in the rate of interest may:

    1. Decrease savings.
    2. Encourage spending.
    3. Increase investment.
    4. Decrease the exchange rate.
    5. Encourage borrowing.

    HOW & WHY DIFFERENT INCOME GROUPS HAVE DIFFERENT EXPENDITURE PATTERN:

    People spend more as their income increases; they also tend to save a large
    percentage of their income. When incomes are very low, there will be no savings- the whole of the disposable income will be required to buy the basic necessities of life. As income increases, however, and the most urgent needs can easily be satisfied, it becomes possible to spend more & save more. When incomes  increase in developed countries, much of the extra spending goes on durable consumer goods(e.g. cars, videos) and on a variety of services (e.g. holidays abroad).

    How does the pattern of  spending change as living standard improve?

     

    Pattern of spending changes  mainly due to the increase of real incomes.
    Food :                   As real incomes rise, people tend to buy a greater variety of better quality foodstuffs but share of income spent on food tends to fall.
    Transport & vehicle :  The rise in real incomes induce growth of private transport & vehicles.
    Housing:                The rise in real incomes increases home ownership, better housing facilities.
    Durable household goods : As real incomes rise, people possess more and more durable consumer goods like air condition, T.V., fridge, mobile phones etc.
    Services :              As real incomes rise, people spend more on holiday, air travel, catering services etc.