In: Economics
What factors are important to a consumer in making his or her consumption–savings decision?
The following factors are important to a consumer in making his/her consumption-savings decision.
a) The Level of Income: Consumption decision is largely dependent
on income. A consumer spends more when his income is high. People
with higher income spend more than people with lower income because
they have extra money to spend after their necessary expenditure
and saving.
b) Consumer's Expectation: Consumer expenditure depends largely on
expectations of the future. If inflation is expected in near
future, then people will purchase durable goods whose prices may
rise after few days.If people expect deflation in near future then
they will wait till prices fall. So consumer expenditure vary
depending on the expectations of future.
c) Interest Rate: Normally, people like to get more by investing
little. They save more when the rate of interest is high and
vice-versa. When rate of interest rises people are interested to
save more by reducing their consumption.
d) Taxes: The taxation policy of the Government also has some
influence on aggregate consumption. When there is an increase in
the level of taxes, people's disposable income will fall. This will
result in a reduction of both consumption and saving.