Fundamentals of Business

Prices

1.1.2.2 Prices
of the goods and services available in relation to income.

1.1.2.3 Preferences
how the consumer believes that the different combinations of goods and services will affect his or her total utility. The assumptions on which demand theory is based are known to hold in most instances with exception of a Giffen good, they still allow economists to predict more precisely how consumers and producers are likely to behave. The elementary demand theory also explains certain paradoxical phenomena, such as why in some cases demand is not inversely correlated with price why diamonds is more expensive than water, are usually far more expensive. One branch of microeconomic theory, deals with optimal choice under conditions of uncertainty; this branch, which has links with game theory, is used by the insurance industry.

Type of good/service in relation to income

Normal Good/service, good for which demand rises as income rises. Inferior good/service a good with a level of consumption that decreases as income rises.

Giffen good
A special type of inferior good.
A good is Giffen if it satisfies the following conditions:
1. The good in question must be an inferior good,
2. There must be a lack of close substitute goods, and
3. The good must constitute a substantial percentage of the buyer's income, but not such a
substantial percentage of the buyer's income that none of the associated normal goods are consumed.

The need for the good/service is also a contributory factor to purchasing decision.

Necessity
is about basic needs, priority is normally given to necessities as they are vital for human life, which are food, shelter and clothing, healthcare e.t.c. For example
If there is bad weather and crops fail, price of food will rise, the rise in demand for homes have pushed property prices up, but as they are necessities, you wouldn't have much choice but to buy the expensive food and take an expensive mortgage or renting.
Optional
is a matter of choice, its purchase can be postponed or cancelled.
For example
George at ASDA 100% cotton Jeans is a generic supermarket brand costs £20 while similar Calvin Klein 100% cotton jeans costs £100 a designer label. They all save the same purpose, the basic need clothing, but in terms of income the more expensive one is optional as it is not a must you should wear it.