In this section we will take a look at household consumption and saving decisions.
Individuals can use their disposable income for either consumption or savings.
Household Consumption and Saving Earlier, we looked at how individuals facing a budget constraint vary the quantity demanded of a good with the good's price. The relationship of a good's demand to circumstances in other markets was described by the substitution and income effects . The substitution effect looked at how changes in prices of substitute goods affect the quantity demanded of the good we are studying. The income effect analyzed how purchasing power is affected by price changes of the good in question. Other factors discussed in Topic 2 would cause the demand curve to shift.