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Consumption and Saving Propensity Levels of Different Groups - Essay Example

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This essay explores the assumptions of the theory of Life Cycle Hypothesis and also studies the effect of intergenerational transfers on Life Cycle Consumption. Various rationales have been considered in the essay in an endeavor to explain factors affecting the propensity of consumption and saving…
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Consumption and Saving Propensity Levels of Different Groups
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Consumption and Saving Propensity Levels of Different Groups

Download file to see previous pages... This paper explicates on the theme of the saving and consumption inclinations of people with the goal of arriving at the rationale propagating two different theories, that explain such people behavior.
With the aim of maximizing profits, it is imperative for businesses to understand the dynamics characterizing consumer trends. This has the effect of better positioning the respective products and services in the competitive market. The consumer decision making process entails understanding the factors affecting their purchasing decisions and the process as a whole. A prime factor affecting the spending power of consumers is the rate and extent of saving. This fashions a principal interest for economists as the dynamics associated with savings and consumption has a correlation with overall performance of the economy; both at a national and global level. Thus, the saving and consumption inclinations of people all through the course of their lifetime form an area of fundamental study.
An economy will, presumably, undergo steady growth once the people decide to spend there cash; this ascertains the circulation of currency. This aids in ensuring the vigor of the economy is maintained. This is one of the rationales backing the measures instituted to instigate expenditure by citizens of a particular nation. However, in order to proficiently perform this feat, it is obligatory to understand the logic of the factor impede consumer spending. It is within this context that numerous theories were proposed to explain this fact.
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The two age groups have a large propensity to consume in relation to other age groups. The rationale in use is that the young population is borrowing against future income while the old population is using their savings. On the other hand, the middle aged population is epitomized by a greater propensity to save and consequently a lower consumption propensity. This might crop from the fact that, they are distinguished by relative higher income levels. A vast number of theories source their existence from a conceptual setup. They are formed to demonstrate the manner in which, variables of interest should behave in the real world. At times, however, facts in the real world may vary from results sourced from the conceptual framework. According to Sheldon Dazinger et al. (1982), the lifecycle hypothesis epitomizes such theories and hypothesis. Initially, the article cites the points with which it conforms. The authors concur that consumers do not hinge their consumption and savings decision solely on the basis of the income levels. There are some additional factors that presume a significant role in this decision making process. These additional factors are best exemplified by future expected circumstances and past experiences, which fashion the core feature in the decision. Past experiences are lessons that consumers take heed of, while future expectations are on the basis of their respective age and consequent income levels. Dazinger et al. set out to investigate if it could be proven that the young engage in saving while the old enage in dissaving activities. The studies factored in the saving tendencies of retirees and those individuals in advanced ages ...Download file to see next pagesRead More
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