Five things economists know about you.

10 . 12 . 18

By Ignatius Wilson

Economists study the relationships between buying and selling, creating and using, distributing and receiving goods and services. Economists can also predict our buying behaviours with laws and principles. These principles can apply as much as to one individual or whole groups of consumers.

 

The law of diminishing marginal utility

This law tells us the more pizza we eat, the less we want or need. It makes sense that up to a point, we want more pizza. The same can be said about most products we buy. Perhaps 3 slices of pizza is the perfect amount. There are sweet spots for all goods. Perhaps one car and two pairs of shoes are the sweet spots for each of these goods.

Economists can measure or predict this and so help governments or businesses plan or supply goods and services (pizzerias, pizza and pizza delivery drivers) to meet the sweet spots of demand for individuals and communities.

 

Complementary products drive demand

If we think about cars, and for whatever reason more people are buying a car, demand for goods and services associated with car ownership will also rise. In this case the government will have to hire more parking rangers and build wider roads while mechanics will open more shops and have to order more spare parts.

This contrasts to substitute products. A substitute may be a bicycle. More people buying a bike means less time driving, fewer cars on the road and that fewer spare parts, like tyres and motor oil, are needed. That said, bicycles have their own complementary products and all products enrich the economy in some way.

It is worth mentioning the third type of product here: the unrelated product. Pizzas are unrelated products to cars. We may hypothesise that more pizza means more pizza delivery drivers driving cars or larger numbers of less fit people preferring to drive rather than cycle, but the effect cannot be measured.

 

Customers don’t notice price changes in products they don’t often buy

Have you noticed the daily media coverage on changing petrol prices? Customers follow this price closely as they may purchase it frequently and need it to use their car, to drive to work or to live a lifestyle they want.

On the other hand, christmas puddings are something we buy perhaps only once a year, or not at all. Changes in their price likely goes unnoticed. The media also don’t pick up, in normal circumstances, the price movements something like a cheap consumable good.

 

Forecast price changes influence spending today

Customers also push the price of products up if they feel like the prices will rise in future. We can see this happening on the sharemarket each day. Buying a stock low because you think its price will rise is a great example of forecast price changes increasing the demand and the value of something immediately.

An example of predicted changes leading to real changes in consumer goods is bananas after a cyclone in North Queensland. When customers hear there will be a shortage in bananas and future price hike due to damaged crops, demand surges and pushes prices up. This drives up prices weeks before the supply chain feels the effects of the shortage and the ‘real’ price increase occurs, due to consistent demand and lower supply.

 

What we buy depends on how much we earn

This may seem obvious but it is a fascinating insight into consumer spending behaviour. It is obvious people with higher disposable incomes buy more expensive goods (designer clothes) and services (perhaps UberBLACK) but have you considered what goods they avoid?

Goods can be described as either normal or inferior products. Normal products experience increased demand as the consumer’s income increases. Inferior products experience decreased demand as the consumer’s income increases. An example of a normal product is red meat. This effect can be seen across developing economies, as community incomes grow, more meat is eaten. At the same time, an inferior, substitute product of grain is eaten less.

To use the example of cars, we may expect demand for expensive cars to rise with drivers’ income. At the same time, demand for cheaper cars may fall, as we have noted the sweet spot for car ownership is one per driver. Here, the more expensive car is called a normal product and the less expensive car is called an inferior product.

Here we have covered five aspects of what is known as microeconomics – how individuals act in an economy and make buying decisions. For more, see our Learning Page.

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