Influences on households' spending, saving and borrowing: culture

Cambridge IGCSE Economics (0455) – Syllabus Notes

1. The basic economic problem

1.1 Scarcity and choice

• Resources are limited → societies must decide how to allocate them.
• Three fundamental questions:

  1. What to produce?
  2. How to produce?
  3. For whom to produce?

1.2 Production Possibility Curve (PPC)

• Shows maximum output combinations of two goods when all resources are fully and efficiently employed.
• Key features to remember for the exam:

  • Shape – bowed‑out because of increasing opportunity cost.
  • Points on the curve = efficient production.
  • Points inside the curve = under‑utilisation (inefficiency).
  • Points outside the curve = currently unattainable.
  • Movement along the curve = opportunity cost.
  • Shift outward = economic growth (more resources or better technology).
  • Shift inward = recession or disaster.

1.3 Opportunity cost

The value of the next best alternative foregone when a choice is made. Illustrated by the slope of the PPC.

2. Allocation of resources

2.1 Demand and supply

• Demand: quantity of a good or service that consumers are willing and able to buy at each price, ceteris paribus.

  • Law of demand – inverse relationship between price and quantity demanded.
  • Movement along the demand curve = change in price.
  • Shift factors: income, tastes, prices of related goods, expectations, number of buyers.

• Supply: quantity that producers are willing and able to sell at each price, ceteris paribus.

  • Law of supply – direct relationship between price and quantity supplied.
  • Movement along the supply curve = change in price.
  • Shift factors: input prices, technology, expectations, number of sellers, taxes/subsidies.

• Market equilibrium: where quantity demanded = quantity supplied. At this price the market “clears”.
• Disequilibrium:

  • Surplus (excess supply) → downward pressure on price.
  • Shortage (excess demand) → upward pressure on price.

2.2 Elasticities

Determinants of elasticity (for both demand and supply) include availability of substitutes, proportion of income spent, time‑frame, and ease of production change.

2.3 Market failure

• Public goods – non‑rival and non‑excludable (e.g., street lighting). Market under‑provides them.
• Merit goods – socially desirable but under‑consumed (e.g., education, vaccinations).
• Demerit goods – socially undesirable but over‑consumed (e.g., cigarettes, alcohol).
• Externalities

  • Positive (e.g., a well‑maintained garden improves neighbourhood property values).
  • Negative (e.g., pollution from a factory).

• Monopoly power – single seller can set price above marginal cost, leading to allocative inefficiency.

2.4 Mixed economy

Most countries combine market mechanisms with government intervention.

3. Micro‑economic decision‑makers

3.1 Households (3.2.1)

3.1.1 What is a household?

A household is the basic consumer unit that decides how to allocate its disposable income between consumption, saving and borrowing. It may consist of a single person, a family, or a group of unrelated people living together.

3.1.2 Main influences on household decisions

1. Income – Higher disposable income usually raises the absolute amount spent and saved; the proportion saved may rise or fall depending on preferences.
2. Interest rate – A higher real interest rate makes borrowing more expensive (reducing loan demand) and saving more attractive (increasing the saving rate).
3. Consumer confidence – High confidence encourages spending and borrowing; low confidence encourages saving.
4. Age / life‑stage – Young adults spend on education and leisure; middle‑aged households save for children’s education and mortgages; older households save for retirement and borrow less.
5. Culture – Shared values, traditions and beliefs shape attitudes toward consumption, thrift, risk and debt.

3.1.3 Cultural influence – in‑depth

How culture shapes spending

• Religious and seasonal festivals (e.g., Ramadan, Diwali, Christmas) trigger higher out‑goings on food, clothing, gifts and entertainment.
• Status symbols – In some societies owning a car, a large house or designer goods signals prestige, leading to higher discretionary expenditure.
• Traditional diets and lifestyles – Cultural cuisine determines the share of income spent on food and influences demand for specific products (e.g., rice vs. wheat).

How culture shapes saving

• Collectivist societies emphasise family support; households save to meet future family obligations such as education, weddings or elder‑care.
• Individualist societies stress personal financial independence; saving is often directed toward retirement, investment or personal goals.
• Religious teachings – For example, Islamic prohibition of interest (riba) encourages saving in interest‑free accounts or tangible assets like gold.

How culture shapes borrowing

• Debt stigma – In cultures where borrowing is viewed negatively, households avoid formal loans and rely on informal saving groups (e.g., rotating‑savings and credit associations).
• Credit as a status tool – Where debt is accepted as a route to upward mobility, households are more likely to use mortgages, credit cards and personal loans.
• Community‑based lending – Strong extended‑family networks can provide interest‑free loans, reducing reliance on banks.

Quantitative illustration – the saving rate

Saving rate = (Saving ÷ Disposable income) × 100.

Example: Disposable income £30 000, saving £9 000 → Saving rate = (9 000 ÷ 30 000) × 100 = 30 %.

Case study – an East Asian household

• Spending: Large share of income goes to tuition fees, textbooks and extracurricular activities.
• Saving: Target saving rate of 30 %–40 % to fund children’s university education and future marriage costs.
• Borrowing: Debt is approached cautiously; families prefer low‑interest, long‑term mortgages rather than high‑interest credit‑card debt.

Summary table – cultural factors and typical impact

3.1.4 Evaluation prompt (AO3)

Assess the extent to which cultural norms can outweigh income effects when households decide whether to borrow for a major purchase (e.g., a house). In your answer consider:

• Social pressure and status.
• Availability of informal credit versus formal bank loans.
• Interaction with interest‑rate changes.

3.1.5 Sample exam questions

1. Explain how cultural attitudes towards debt can affect a household’s decision to borrow. (AO1)
2. Using a diagram, illustrate how a cultural festival might shift a household’s budget constraint and discuss the likely impact on saving. (AO2)
3. Compare the saving behaviour of households in a collectivist society with those in an individualist society, and evaluate which factor – culture or income – is likely to have a stronger influence on saving rates. (AO3)

3.2 Money and banking

• Functions of money: medium of exchange, unit of account, store of value, standard of deferred payment.
• Forms of money: commodity money, fiat (paper) money, electronic money.
• Central bank (e.g., Bank of England, Federal Reserve):

  • Issues currency, controls money supply, sets the official interest rate.
  • Implements monetary policy to achieve macro‑economic aims.

• Commercial banks:

  • Accept deposits, provide loans, create money through the multiplier effect.
  • Key terms – deposit, loan, interest rate, credit rating.

• Money market instruments (short‑term): Treasury bills, commercial paper, certificates of deposit.

3.3 Workers (labour market)

• Labour supply – influenced by population, education, wages, working conditions, immigration.
• Labour demand – derived demand from firms; depends on product demand, technology, wages.
• Wage determination – interaction of supply and demand; can be affected by minimum wage legislation, trade unions, collective bargaining.
• National Minimum Wage (NMW) – government‑set floor to protect low‑paid workers.
• Unemployment types:

  • Frictional – short‑term, job‑search.
  • Structural – mismatch of skills.
  • Cyclical – caused by downturns.

3.4 Firms

• Types of firms – sole trader, partnership, private limited company (Ltd), public limited company (PLC).
• Production costs:

  Cost	Definition
  Total Cost (TC)	All costs of production.
  Fixed Cost (FC)	Does not vary with output (e.g., rent).
  Variable Cost (VC)	Changes with output (e.g., wages for hourly workers).
  Average Fixed Cost (AFC)	FC ÷ Q.
  Average Variable Cost (AVC)	VC ÷ Q.
  Average Total Cost (ATC)	TC ÷ Q = AFC + AVC.
  Marginal Cost (MC)	Change in TC from producing one extra unit.

• Revenue concepts:

  • Total Revenue (TR) = Price × Quantity.
  • Average Revenue (AR) = TR ÷ Q (equals price in perfect competition).
  • Marginal Revenue (MR) = Change in TR from selling one more unit.

• Economies of scale – average costs fall as output rises because fixed costs are spread over more units.
• Market structures (brief overview):

  • Perfect competition – many sellers, identical products, price‑taker.
  • Monopoly – single seller, price‑setter, barriers to entry.
  • Oligopoly – few large firms, inter‑dependent pricing.
  • Monopolistic competition – many firms, differentiated products.

3.5 Markets (overview)

While diagrams are not required for the IGCSE exam, it is useful to know the characteristics of each market type and the likely outcomes for price, output and efficiency.

4. Government and the macro‑economy

4.1 Macro‑economic aims and possible conflicts

• Economic growth (increase in real GDP).
• Low unemployment.
• Low and stable inflation.
• Equitable distribution of income.
• External balance (stable exchange rate, manageable current‑account deficit).

Conflicts can arise – e.g., policies that boost growth may increase inflation; reducing unemployment can put upward pressure on wages and prices.

4.2 Fiscal policy

• Government budget – revenue (taxes) vs. expenditure (spending). Deficit = spending > revenue; surplus = revenue > spending.
• Taxes:

  • Direct (income tax, corporation tax) – paid directly by individuals/firms.
  • Indirect (VAT, excise duties) – built into the price of goods.
  • Progressive – higher rates on higher incomes; regressive – larger burden on lower incomes.

• Government spending – can be on goods & services, transfer payments, subsidies.
• Expansionary fiscal policy (increase spending or cut taxes) → boosts aggregate demand, helps growth and reduces unemployment but may raise inflation.
• Contractionary fiscal policy (decrease spending or raise taxes) → reduces inflation but can increase unemployment.

4.3 Monetary policy

• Controlled by the central bank.

  • Open market operations – buying/selling government securities.
  • Changing the official interest rate (base rate).
  • Reserve requirements for commercial banks.

• Expansionary monetary policy (lower interest rates, increase money supply) → encourages borrowing and spending, reduces unemployment, may increase inflation.
• Contractionary monetary policy (higher interest rates, reduce money supply) → curbs inflation, can raise unemployment.
• Exchange‑rate effects: lower interest rates tend to depreciate the domestic currency, boosting exports.

4.4 Supply‑side policies

• Improve long‑run productive capacity.

  • Education and training – raise skill levels.
  • Infrastructure investment – improve transport, communications.
  • Deregulation – reduce red tape for businesses.
  • Tax incentives for research & development.
  • Labour‑market reforms – flexible wages, reduce trade‑union power.

4.5 Growth, recession, unemployment and inflation

• Economic growth – measured by real GDP or real GDP per head. Long‑run growth driven by capital formation, labour force growth, and technological progress.
• Recession – two consecutive quarters of negative real GDP growth.
• Unemployment – measured by the unemployment rate (U = (Number unemployed ÷ Labour force) × 100). Types already listed under “Workers”.
• Inflation – sustained rise in the general price level.

  • Measured by Consumer Price Index (CPI) or Retail Price Index (RPI).
  • Demand‑pull inflation – excess aggregate demand.
  • Cost‑push inflation – rising production costs (e.g., wages, oil).

5. Economic development

5.1 Measuring development

5.2 Poverty

• Absolute poverty – living below a set threshold (e.g., $1.90 a day).
• Relative poverty – earning significantly less than the median income in a society.
• Causes: low productivity, inadequate education, poor health, geographic isolation.
• Policy responses:

  • Transfer payments (social welfare, food stamps).
  • Micro‑credit schemes.
  • Investments in health and education.

5.3 Population dynamics

• Components: birth rate, death rate, net migration.
• Demographic transition model – shift from high birth/death rates to low birth/death rates as economies develop.
• Economic impacts:

  • Young, growing populations can provide a “demographic dividend” if jobs are available.
  • Aging populations increase demand for health care and pensions, can reduce labour supply.

5.4 Why development gaps exist

• Differences in capital stock, technology, education, institutions, political stability, and access to international markets.
• Geographic factors – landlocked countries, climate, natural resource endowments.
• Historical factors – colonial legacy, trade patterns.

6. International trade & globalisation

6.1 Specialisation and comparative advantage

• Countries benefit by specialising in goods where they have a lower opportunity cost and trading for other goods.
• Result: higher world output and potential for higher national welfare.

6.2 Benefits and costs of free trade

• Benefits:

  • Access to a larger variety of goods at lower prices.
  • Economies of scale for exporters.
  • Technology transfer and foreign direct investment (FDI).

• Costs:

  • Domestic industries may shrink or disappear.
  • Job losses in sectors unable to compete.
  • Dependence on external markets.

6.3 Trade protection

6.4 Globalisation

• Increased movement of goods, services, capital, people and ideas across borders.
• Drivers: advances in transport and communication, trade agreements (e.g., WTO, EU), multinational corporations.
• Impacts:

  • Economic growth in many developing countries (e.g., China, India).
  • Greater cultural exchange and consumer choice.
  • Concerns over environmental degradation, labour standards, and income inequality.

7. Revision aids

7.1 Quick‑reference tables

7.2 Suggested exam technique

1. Read the question carefully – note the required AO (AO1, AO2, AO3).
2. Plan a brief structure: definition → diagram (if required) → explanation → evaluation.
3. Label all diagrams clearly and refer to them in the text.
4. When evaluating, weigh at least two advantages and two disadvantages, and consider short‑ vs. long‑term effects.
5. Use real‑world examples (e.g., cultural festivals, East Asian saving habits, UK mortgage market) to demonstrate understanding.

8. Key take‑aways

• Scarcity forces societies to make choices; the PPC visualises these trade‑offs.
• Demand and supply, together with elasticities, explain how markets allocate resources and why government may intervene.
• Households, firms, workers and governments each face distinct influences – income, interest rates, confidence, culture, policy, technology, etc.
• Culture is a powerful, often overlooked, influence on household spending, saving and borrowing patterns.
• Macroeconomic policies (fiscal, monetary, supply‑side) aim to achieve growth, low unemployment and price stability, but they can conflict.
• Development is multi‑dimensional; measuring it requires more than just GDP.
• International trade brings gains from specialisation but also distributional costs; protectionist measures have both supporters and critics.
• Effective exam answers link theory to diagrams, use relevant examples, and provide balanced evaluation.