The following points highlight the top nine factors affecting household consumption and saving. The factors are: 1. The Level of Income and its Distribution 2. Consumer’s Expectations 3. The Rate of Interest 4. Tastes and Preferences 5. The Terms of Consumer Credit 6. The Stock of Wealth 7. Existing Stock of Durable Goods 8. Taxes 9. Sales Effort of Business Enterprises.
Factor # 1. The Level of Income and its Distribution:
Consumption depends largely on income. The higher the income of an individual the more it is likely to spend on consumption. All other things being the same, people with high incomes would normally spend’ more of consumption goods than people with low incomes.
Since income is inequitably distributed in most non-socialist countries different income groups have different marginal propensities to consume (MPCs). In general the MPC of lower income groups tends to be much higher than that of the very right. Thus a redistribution of income from the rich to the poor is likely to lead to a higher MPC for the economy as a whole.
Factor # 2. Consumer’s Expectations:
Consumer expenditure is largely influenced by expectations of the future. Three main factors which bear relevance in this context are expectations of inflation, unemployment and income.
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Price Expectations:
If people expect that an inflation is likely to occur in near future they tend to purchase durable goods whose prices may rise after some time. If people expect deflation to occur they will wait for the price to fall before making purchases. Moreover, people tend to purchase more of certain essential commodities like food articles than they normally do if their prices are likely to rise in future.
Factor # 3. The Rate of Interest:
The rate of interest is the reward for saving. Normally people save more when the rate of interest is high than when it is low. Thus people can be induced to save more by offering a high rate of interest. If the rate of interest rises people may voluntarily curtail their consumption to save more. Thus the rate of interest and consumption spending are inversely related.
Factor # 4. Tastes and Preferences:
People’s attitude towards savings is affected by tastes. If this context we may refer to time preference and bequeath motive. Time preference refers to people’s preference of current over future consumption. If people are very impatient they will be unwilling to postpone present consumption in order to consume more in the future.
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In this case people are said to have strong time preference. Their saving will therefore be very small. On the other hand, if people have weak time preference they will save more.
In this case people will be willing to postpone or defer current consumption in order to consume more in the future (by earning interest on their savings). There is a second motive for saving. If people have a strong desire to pass wealth to heirs after death, the willingness to save will be great.
Factor # 5. The Terms of Consumer Credit:
Since many goods, especially consumer durables, are bought with the aid of hire purchase or other forms of credit, the terms on which these are available and their cost have an effect upon the level of demand for such goods. The terms of such credit may vary from a few months (as in the case of radios) to a few years (as in the case of cars).
If credit becomes more costly and difficult to obtain, many people will postpone their purchase of durable (credit-financed) goods.
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If the margin money that has to be paid by borrower rises from 10 to 20 per cent, households that had just managed to save 10 per cent of the purchase price would like to defer their purchases until they saved 20 per cent of the purchase price. There may thus be a temporary reduction in current consumption expenditures until the households succeeded in saving the extra amount.
Factor # 6. The Stock of Wealth:
People save in order to add to their stock of wealth. Saving is a flow while wealth is a stock. If something happens to reduce wealth (such as a capital loss) people may save more to restore their wealth.
If something happens to increase their wealth suddenly (such as a capital gain) people may reduce their rate of saving as they feel less need to add to their now-larger stock of wealth. Thus, sudden changes in wealth may alter consumption plans or decisions.
An increase in wealth due to some reason may discourage saving and hence the level of consumption associated with each level of income increases. Since purchase can be made not only out of current income but also from assets and savings of consumers, the volume of savings (which is a part of an individual’s total wealth) can influence consumption.
For example, those with savings may be willing to maintain their level of consumption in the face of falling income. It is also argued that the people with a cushion of savings are more willing to spend a greater proportion of their income.
Keynes pointed out that the price of bond varies inversely with the rate of interest. If the market rate of interest falls the market price of existing (old) bonds will rise. Those who sell their bonds will now make a capital gain. This may stimulate their consumption spending. This is known as the wealth effect or the real balance effect.
P. A. Samuelson has pointed out that when people buy a large number of government bonds they feel wealthier than before. This increase in a perceived wealth of the community may stimulate consumption spending although, in real terms, their stock of wealth is no more than before (because government bond is an alternative to other assets in people’s portfolio of wealth such as equities or preference shares.)
Factor # 7. Existing Stock of Durable Goods:
The consumption of non-durable goods such as food and clothing cannot be postponed indefinitely or curtailed drastically. But the purchase of durable goods can easily be deferred. Moreover, since durable goods spread out their services over a long period current purchase of such goods is supposed to make a small addition to their existing stock.
Normally during war or emergency durable goods are difficult to purchase because they are not readily available. Thus with the cessation of war or lifting of emergency there may be a sudden increase in expenditures on durable. Since the expenditure on non-durables remains more or less steady at all times, purchases of durable goods, which are volatile, can cause sharp shifts in total consumption spending.
Factor # 8. Taxes:
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The fiscal policy of the government is also likely to exert some influence on aggregate consumption. If the government raises the level of taxes people’s disposable income will fall. This will lead to a fall in both consumption and saving.
Factor # 9. Sales Effort of Business Enterprises:
Finally, consumers are likely to respond favourably to sales efforts of business firms. In an age of consumerism, business firms can increase the sales of their products through advertising or various sales promotion measures. Advertising has the effect of shifting demand from one product to another. But/ as G. Ackely has opined, whether total demand for goods and services will rise as a result of advertising is debatable.