ch. 10: consumption & savings

Ch. 10: Consumption & SavingsGr. 11 Economics (CIE3M1-01)M. Nicholson

Consumption

•Consumption is that part of an individual’s income that is spent on goods & services rather than saved.

•Consumer demand determines what goods & services are produced

Consumption

•Factors influencing consumer choiceIncome levelsFashionCustomAdvertising

Consumption

•Consumer protection Goods and services much more complex than in the past, therefore vulnerable consumers need to be protected by:

GovernmentBetter Business GroupsConsumer Protection Groups

Consumption

•Consumer creditThe ability to buy now and pay laterOther sources of credit include bills we

receive and pay well after we have used the product (e.g. hydro, telephone)

Credit cards such as Visa and MasterCard are very popular, but unpaid balances have punitive interest payments of 18.5 %

Consumption

•Consumer creditCharge accounts like a Sears card are

growing less popular as they become credit cards (e.g. Canadian Tire)

Conditional sales contracts are installment payments that if not paid allow the seller to repossess the product sold

Consumption

•Spending patterns of Canadiansincomes ↑ expenditures ↑ < savings ↑ expenditures as a percentage of income

decrease as income rises e.g. spend $12,000 of a $12,000 income

which is 100% whereas spend $40,000 of a $60,000 income which is 66%

Consumption

•Personal financesGood idea to develop a budget or

financial plan showing expected income & expenditures

it helps control your consumption to avoid debt caused by poor purchasing decisions

Savings

•Savings are that part of current income that is not spent

•LoansBanks, trust companies, and credit unions

borrow money from individual Canadians (e.g. personal chequing account, chequing / savings account, savings account, guaranteed investment certificates)

Savings

•LoansGovernments borrow money through

savings bonds (e.g. Canada Savings Bonds)

Life insurance savingsCorporate bonds

Savings

•EquitiesStocks or ownership in a corporation offer

a high return, but risk of losing investment can be high

Real estate offers homeowner’s equity, the difference between the value of the house and outstanding loans plus there is no capital gains tax on the increased price a home seller may receive

Savings

•Mutual / Investment FundsSafer investment because of

diversification and professional management

E.g. equity funds, bond funds, mortgage funds, money market funds, balanced funds

Savings

•Life InsuranceA contract in which one party (the

insurer) agrees to pay another (the insured) a sum of money in the event of a specific loss (e.g. death)

Term insurance, Straight-life / Whole-life insurance, Limited-pay life insurance

Savings

•Share ownership among Canadiansimage of Canadians being very

conservative and adverse to risk ownership of stocks ↑ 16% to 21 % of

the population between 1989-93 25 % own equity funds

Savings

•Registered Retirement Savings PlansMethod of reducing taxable income and

saving for retirement•You and your investmentsDecide on reasonable financial objectives

(e.g. 3 bedroom house, minivan, Florida vacation)

greater risk = greater potential returns less risk = less potential returns

Savings

•You and your investments Income large enough? Future income? Age? Time, interest, knowledge in investments? Tax situation? Risk tolerance?