ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The life-cycle hypothesis (LCH) is an economic theory that describes the spending and saving habits of people over the course of a lifetime. The theory states that individuals seek to smooth consumption throughout their lifetime by borrowing when their income is low and saving when their income is high.

Detailed explanation-2: -The life cycle hypothesis tries to explain the consumption pattern of an individual over a lifetime. It states that an individual plan his/her consumption and savings pattern base on their anticipated life income. People who are younger tend to consume more than the income they receive.

Detailed explanation-3: -The life-cycle theory assumes that household members choose their current expenditures optimally, taking account of their spending needs and future income over the remainder of their lifetimes.

Detailed explanation-4: -The permanent income hypothesis is a theory of consumer spending stating that people will spend money at a level consistent with their expected long-term average income. The level of expected long-term income then becomes thought of as the level of “permanent” income that can be safely spent.

Detailed explanation-5: -Criticisms of Life Cycle Theory It assumes people are rational and forward planning. Behavioural economics suggests many people have motivations to avoid planning. People may lack the self-control to reduce spending now and save more for future. Life-cycle is easier for people on high incomes.