Psychology & Consumer Economics Summary

Reading Summary: Psychology and Consumer Economics

Changes in the economy have been traditionally attributed to the business and government sectors. Consumer behavior was not regarded to be important until now when economists widely agree that purchase of goods by consumer exerts influence on the economy. Consumer expenditure varies more than the variation of income as it is dependent on consumer’s willingness to buy too. Surveys on collecting consumer behavior data and measures of consumer expectation were initiated after the Second World War. Currently, analysis of micro-level data collected matches with analysis of macro-level data like Gross National Product. People-oriented factors such as psychological factors, consumer attitudes and perceptions can be used to speculate patterns of consumer spending and saving.

        In the context of behavioral economics, there is disinclination to include behavioral science in mainstream economics. This is because of the difference in technique of study. A preliminary hypothesis is framed and tested for its validity after which it is reframed and tested again till results are found. The focus is on recognizing the time and circumstances that produce a type of response. Results due to differences in methodology are as follows:

Inflation and Consumer Spending – There are two basic assumptions backing the theories of inflation.

Firstly, if incomes increase faster than the quantity of goods supplied, then the general price level will rise because of excess purchasing power.

Secondly, if people believe that prices are going to rise, they will use their liquid funds to purchase and stock up goods at the ongoing lower prices.

Thus, we can conclude that inflation and increase in consumer demand run parallel. Some people delay the purchase of desirable, non-essential goods and services during inflation. Also, they tend to save more due to uncertainty in price increases. This leads a different response in consumer spending during inflationary periods. The relation between inflation and consumer spending has to be analyzed based on the situation rather than looking for a single compulsory response to a change in income and prices.

Personal saving in periods of prosperity and recession – During a period of Upswing, net saving generally declines due increase in purchase of durable goods and installment buying, unusual cash expenditures and decreased saving motive. Similarly, net saving increases during recession because of reduced credit incurrence and strong saving motive. However, if the frequency and size of income increases as in an Upswing, then the saving grows and if they decrease as in a recession, then net savings decline.

Wealth and saving – Consumption is a function of wealth. Liquid asset holdings may accelerate consumer spending. Asset holders exhibit two kinds of behavior – continuation of substantial saving or dissaving. Definite explanations for displaying one type of behavior are not available. It depends on the circumstances. Larger the amount of wealth, smaller may be the proportion of income saved. Else, people with large assets may save more due to habitual saving and increase in aspirations. Research has shown that there is a desire to save even among the higher echelons of the society.