How does disposable income affect a person’s ability to consume? Give a real-life example.
Answer (2)
Disposable income is the amount of money a person has left after paying taxes. It directly affects their ability to consume because it determines how much they can spend on goods and services beyond basic needs like food, housing, and transportation.Real-life Example of Disposable IncomeIf someone earns $3,000 per month and pays $1,000 in taxes, their disposable income is $2,000. If their essential expenses are $1,500, they have $500 left to spend on non-essentials like dining out, entertainment, or saving for a vacation. If their taxes increase or they face a pay cut, their disposable income drops, reducing their ability to consume non-essential items.
Disposable income refers to the money a person has left after paying taxes. It is the amount they can use for spending or saving. The higher the disposable income, the more goods and services a person can afford. On the other hand, if disposable income is low, people have to limit their spending and prioritize only the most important needs.In the Philippine context, imagine a high school teacher earning ₱25,000 per month. After taxes and deductions, the teacher takes home around ₱22,000. This ₱22,000 is their disposable income. With that amount, the teacher must budget for groceries, rent, transportation, and maybe some leisure activities like going to the movies or buying clothes.Now, suppose the government lowers income tax rates. The teacher’s take-home pay increases to ₱24,000. With an extra ₱2,000, the teacher may now decide to buy a small appliance, eat out with the family, or even save part of the money. That increase in consumption, even on small things, contributes to the country’s GDP.Disposable income is also linked to economic policy. If inflation rises and prices of goods go up (like onions reaching ₱400 per kilo, as happened in 2022), then the real value of a person’s disposable income falls. Even if their salary stays the same, they can buy less.Therefore, disposable income is a powerful indicator of consumer behavior. It determines how freely people can spend, and in turn, it influences the health of the overall economy.
