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. However,
economists now 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

Group No. 4 | Consumer Behavior

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.

Saturation with consumer goods – A reduction in consumer demand may happen due to
exhaustion of wants after long periods of economic prosperity. Alternately, there is a view of
growth of wants in prosperous years. Principles framed by Kurt Lewin suggest that aspirations
are dynamic. They tend to increase with success and decrease with failure. Aspirations are
influenced by the other members of social groups and are dependent on reality. New wants and
expenditures is not the core issue. People view their accomplishments uniquely. If they are
satisfied with their progress, they may increase their aspirations. Success in the past is motivation
for optimistic expectations of the future. People do not acknowledge the difference between real
income and money income. Here, long-lasting durable goods and not consumer goods are
desired. Procuring a large amount of consumer goods is not the goal of advancement.

Success needs to be redefined. Prosperity in non-material aspects of life may or may not
be accepted by the greater population. Studies on consumer behavior must include subjective
psychological data. Data from the past can be used to develop an understanding of what to
expect in the future.

Group No. 4 | Consumer Behavior