Individual sets of needs and desires drive people's purchasing behaviors and decisions. From an economic perspective, you decide to purchase certain products over others because of limited resources -- because you can't afford everything, you must choose some things and reject others. When you make a decision, you're seeking to increase your feelings of pleasure or satisfaction. With all choices, you must decide which alternative is going to give you that satisfaction and which choice is worth sacrificing for it.
Your income determines how much you can afford to allocate to different needs and wants. Most of us need a place to live, transportation and a certain amount of food. Economists refer to these as basic needs, which tend to get first priority. Your income is limited, whether it comes from traditional employment, self-employment or a combination of these -- even if you're a billionaire. Of course, someone who has a lower income will tend to spend a higher percentage on basic needs because they have to. Households with higher incomes can afford to allocate more of their incomes, as a percentage and in absolute dollar terms, to discretionary purchases, such as vacations, cars, second homes and island-sized yachts.
Once you've met your basic needs, your purchasing behavior is largely driven by what you desire, assuming that you have enough income to provide for some discretionary spending. New products on the market and changes to your lifestyle can make you aware of new wants. If you take a different job that requires more hours of work, for example, you might find that you want more convenience when preparing your meals. Less time for yourself might also mean that you'll want to consider hiring a maid, provided you have the income. Advances in technology can also drive the desire or even necessity for some purchases.
Supply and demand largely influence the market price of products and services. When supply is low and demand is high, the price is likely to rise. A product or service that has low demand but ample supply tends to carry a lower price. Competition among companies that supply the same product or service can influence the price. With less competition, prices tend to be higher. And a higher price for one product may prompt you to choose a lower-priced product that meets the same need. For instance, you might choose a less expensive soy milk over regular milk. Or you might choose to drive an electric car or take the bus more often if the price of gasoline rises too high. Or, if only one company in the world produces island-sized yachts and it wants the equivalent of the gross national product of Jamaica for it, you might want to settle for something smaller that floats. Say, a houseboat.
Since you have limited resources, including money and time, your purchase behavior is also driven by opportunity costs. You can think of opportunity costs as being the same as tradeoffs. For example, if you spend a third of your income today on an island-sized yacht, you may have nothing left to invest. If the investments that you did not make double in value in the next year, the opportunity cost of your fancy dinghy is equal to twice its price. Given an opportunity cost that high, you might decide to pare back on your boating lust to devote a few more dollars to investments.
The ability to get affordable credit might influence whether you delay major purchases, such as a car or a house. High interest rates tend to discourage borrowing, while low interest rates encourage it. Easy access to money translates into more economic activity as everyone queues up to buy more on credit. High interest rates do the opposite -- everyone contracts their spending as the high cost of borrowing raises the price of consumption.
- Economics: Principles, Problems, and Policies; Stanley L. Brue, Ph.D. and Campbell R. McConnell, Ph.D.; Pgs. 1-10.
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