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Inflation and the economy

Most people in the UK have enough money to buy essential goods and services such as food, clothes and heating. Some people receive extra income from the government to help them manage if, say, they are not working. Many people have enough money to be able to afford things such as holidays and entertainment.

Saving and borrowing

If someone wants to buy something they cannot yet afford, they have a choice. They can either save their money and receive interest, or borrow money and pay interest on the loan.

Although people borrow money from a bank, the bank is actually lending them the money it gets from savers. The interest paid by borrowers to get money to spend now goes to savers to persuade them to delay their spending and put their money into the bank instead. Borrowers also pay the bank a bit of extra interest for its services.

How much?

The amount we spend will mostly depend on how much we earn and how much we have saved. Many factors influence which goods and services we buy. If something becomes more expensive, we might stop buying it, buy less of it, or buy something else. If it becomes cheaper, we might buy more of it or more of other things with the extra money we would have.

What we buy and what we pay?

Our combined spending decisions also influence prices. The cost of manufacturing a product or providing a service is reflected in the cost, but they will also reflect how popular something is - its demand - and how much is available or provided by companies - its supply.

Take fashion for example:

As the new styles are in the shops, demand for the old ones has dropped and producers have stock left over. Therefore, some prices will fall to make them more attractive to buy. They can charge more for the new styles because they know they will be popular.

Producers, prices and profits

Producers want to earn profits to make it worthwhile making and selling goods and services. When deciding how much to charge for a product they have to think about how much their product or service costs to make or provide.

Producers will not want to supply goods if prices are low, as they will struggle to cover their costs. If prices are well above costs, profits rise and the producers will increase their supply.

If something is expected to be very popular, a company may decide that the consumer will be prepared to pay higher prices (take game consoles for example), but it also has to think about what its competitors might charge. If the company has developed a new product, then it may be able to charge more, but if there is competition from other firms, the price is likely to be lower.