Understanding Business Behaviour
In order to understand how the economy functions, it is essential for us to comprehend the behaviours of the three economic agents; households, organisations and government. The one we are focusing on here is the household. According to Longman Dictionary of Contemporary English, household can be defined as “all the people who live together in one house.” (Longman, p.697)
Economic decisions are made within the household with regards to how much income is earned, how much is to be consumed, what is to be consumed (clothes, electronic goods, holidays etc.) and how much has to be distributed to each member. In regards to the consumption behaviour, the demand for household on consumer goods can be influenced by a few factors at a micro level.
A family which cannot afford a personal computer at home may be able to do so if the household income rises. When the family is trying to made ends meet to fulfil all other necessities, a personal computer may be viewed as a luxury. However, if the income of the household increases in the future, with other factors remaining the same, this luxury of having a computer at home may become a necessity. In other words, the demand
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The demand curve in the graph shows a relationship between the price of the product, which is plotted on the vertical axis, and the quantity demanded, which is plotted on the horizontal axis (please see Figure 1 below). All other factors remain constant. Due to the law of demand (Reader, pX), the demand curve is downward sloping. Thus, in the case of increasing income and all other factors remaining constant, the demand curve will shift to the right indicating an increase in the quantity demanded for that good at all prices (please see blue arrow in Figure 1 below).. Vice versa, when the income falls, the demand curve will shift to the left, showing a fall in the quantity demanded.
There are exceptional cases whereby the demand falls when the household’s income rises. These goods are called inferior goods. An example of these inferior goods is some top-load washing machines which have no other features than washing the clothes. The demand for these machines will fall when the household’s income rises because the consumers are in a better economic situation to afford a front-load washing machine which has many special features including a dryer.
The price of a household product is another very important factor that influences the behaviour of the household’s demand. According to economists, the law of demand (Reader, pX) states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. Let’s look again at the demand curve below (Figure 2):
A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).
Household demand for consumer goods can also be affected by prices of substitute goods. A product is a substitute for another product if the former can satisfy similar needs or desires as the latter. To what extent one product can substitute another gives rise to the notion of ‘close’ substitutes or ‘weak’ substitutes. Two goods are substitutes when a rise in the price of one causes an increase in demand for the other. For instance, when the price of a Macintosh increases, consumers will find it cheaper to get a personal computer. Thus the demand for personal computers will rise while the demand of its substitute (the Macintosh) decreases.
The next important factors to consider are the prices of complimentary goods. The demand of a household appliance can be affected by the price of complimentary goods. A product is complimentary to another product when they are used together. This means that the use of one good implies the use of another, and a decrease in price of one will usually increase the demand for another. The law of demand (Reader, pX) states that an increase in the price of a television will decrease the demand for it. The demand for its complimentary good, for example, a DVD player will also decrease. Vice versa, if the price of a computer falls, the demand for a printer will increase accordingly.
A number of social and cultural factors can also affect the consumption behaviour of a household. Two factors are the demonstration effects and dependence effects pointed out by Wheelock (Wheelock, pX). When we talk about demonstration effects, we are referring to the ‘keeping up with the Joneses’ attitude. When one sees another, whether a friend, relative, neighbour or colleague, in possession of some innovative or impressive brand new product, one may feel the peer or social pressure to get the same product in ones own household.
Galbraith (Galbraith, pX) was the first to use the term dependence effect to explain on how household consumption behaviour is affected by the process of the suppliers marketing strategies. A household may purchase a product because of the attractive packaging, promotion (e.g. buy 2 get 1 free), advertisements or persuasion of the product’s supplier (e.g. adding a free gift). This may be viewed as ‘wasteful’ consumption as the goods are not bought for a real demand. A coffee seed grinder is a prime example. You may use it once or twice and then it will be left there in the corner of your kitchen.
There are also socio-economic factors which affect the demand of the household on certain household appliances. What a consumer can buy in England may not be available in another country like Indonesia. You may get the newest computer in the Japanese market but you may not be able to find this in Sudan. The technological developments of a country often have a big impact on patterns of household consumption behaviour too, as a country with more advanced technology will have more options for a household to choose from.
An increase in the price of substitute goods, a reduction in the price of complimentary goods or a favourable change in socio-economic preferences will also cause a rightward shift in the demand curve (please see blue arrow in Figure 1 above).
In conclusion, the household demand for consumer goods at a micro level is dependent on various factors. The consumption behaviour can be affected by the income of the household, price of the goods, the price of substitute goods, complimentary goods, the socio-economic factors as well as the social and cultural factors.
Mordaunt, Jill. 2006. Understanding Business Behaviour. The Open University. United Kingdom.
Longman. 1999. Longman Dictionary of Contemporary English: International Students Edition. Pearson Education Limited. Spain.
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