Householdsaving and demand economics
Householdsaving and demand economics
Householdsaving can be termed as the difference between the disposable incomeof a household and its consumption. Disposable income includesself-employed revenue, received wages and property income whileconsumption includes expenditures on goods as well as services. Insome countries saving rates have stabilized while have declined insome. USA, UK, Japan, and Hungary among others are the worst affectedin terms of saving. There are various factors that affect the savingbehavior of the households such as pension schemes and different taxsystems. Country’s population’s age, ease and availability ofcredits as well as social factors tend to affect the saving rates(Froebet al.,2016). Household saving has a direct influence in the overall economyof the nation as the document discusses.
Thenature of household saving dictates the economic development of thatnation. Long-term economic growth in a nation demands capitalinvestment. The capital investment should be in terms ofinfrastructure, technology, and education. This capital investmentneeds to be directed in business expansion, factories and so forth ifthe overall economy of a nation is to improve (Salvatore,2015).The main funds’ source domestically for this capital investmentcomes from the household savings. This implies that high rates ofsaving in a country over time can help a constant availability offunds for growth. Another advantage of household savings in acountry’s economy is that household savings help a significantportion of the overall debt of the country to be internally financed.
Accordingto economic analysts, this is more sustainable strategy thatfinancing debts of a nation from foreign or external creditors.Nations such as the United Kingdom as well as the USA whose debtlevels are somewhat lower have relatively low household saving rates.However, it is evident how essential household saving is when the2007/2008 economic recession shook the American economy. Japan has avery strong household savings, and it has been accredited inrelieving it a significant debt burden (Alexander& Caribbean Association of Home Economists, 2002).The level of savings can trigger the gross domestic product growth.Increased saving rates coupled with low domestic consumption canresult in a larger share of the GDP growth. This will in return leadto the development of the economy of the respective nation to a greatextent.
Therehave been questions on how the proportion of income households shoulddedicate in its investment. Some analysts indicate that people needto start saving 10 to 15% of their income to the retirement benefits.The 50/30/20 thumb rule, however, have been credited with most of theeconomic analysts as the best determinant of how income should bedivided. It is also termed as the renowned quick and easy advice. Theanalysts indicate that a maximum of 50% should be spent onnecessities, 30% on discretionary items and 20% should be dedicatedon savings (Salvatore,2015).In other words, household saving should be approximately 20% of ahousehold’s income.
Thedemand function is Qx= 75-2Px-1.5py where Py= price of good y and Px=price of good x. when Px=20 and Py=10
Ifcost of Y can be increased while the cost X remains constant
Pybecomes 20 and Px=20, Qx=?
Ifthe cost of X increases maintain Y at constant
Ex,y = =
Ex,y = -1.8
Negativeelasticity reveals that the products presented in the demand functionare complementary goods.
Thisindicates that good X and Y are complementary goods in that increasein the price of either of the product tends to reduce the quantitydemanded. Since increase in price of either of the products reducesthe quantity demanded, the demand function represents an elasticdemand curve.
Alexander,T., & Caribbean Association of Home Economists. (2002). Caribbeanhome economics in action.Oxford: Heinemann.
Froeb,L. M., McCann, B. T., Ward, M. R., & Shor, M. (2016). Managerialeconomics: A problem solving approach (4th ed.). Boston,MA: Cengage Learning. ISBN: 9781305259331.Salvatore,D. (2015). Managerialeconomics in a global economy (8th ed.).New York, NY: Oxford University Press. ISBN: 9780199397129.