Fundamentals of Business

The theory of consumers demand

1.1.2 The theory of consumers demand

Assumption
consumers are humanbeings and are rational, that is, they want to make the decision that will give them the greatest satisfaction, that is, maximizing their value for money of a good/service. How do consumers make purchasing decisions?

The options available to the consumer are determined by his or her:

1.1.2.1 Buying power
a function of income and access to capital, including credit.

How important is credit on consumers demand and a firm's supply? Some goods/services sold by firms, their prices exceed wholly or partially an average individual consumer's income as a proportion, hence, a consumer has two options:
Option 1 : A consumer has to save and accumulate enough money for the purchase
or Option 2 : A consumer has to seek credit to finance purchase wholly or partially. For this example, I will use option 2 Effects of credit on a consumer Scenario 1 When credit is easily and readily available, the demand for goods/services that depend on credit for their purchase will rise, as an individual consumer borrows more and spend more.

Example Extract from bbc·co·uk, Sunday, 23 December 2007 Scotland top of house price chart Scotland and south-east England saw the biggest house price rises in 2007, a Halifax Estate Agents survey suggests. Eight of the top 10 towns recording the largest price increases during the year were from the two areas. Montrose in Angus saw the strongest growth, with prices rising 39% on average. Winchester, Hampshire, was just behind with a 38% leap. The average house price was more than £100,000 in all towns surveyed - half had an average higher than £200,000.

Scenario 2 When credit is tight and scarce (credit crunch), demand for goods /services that depend on credit for purchase will fall, as lenders become less willing to offer credit, an individual consumer spend less and try to save more.

Example Extract from bbc·co·uk, Thursday, 29 May 2008 House price falls at new record UK house prices have recorded their largest monthly fall since 1991, says the Nationwide building society. Prices have fallen by 2.5% during May, according to its latest monthly survey. The lender said prices were now 4.4% lower than a year ago, a drop of £8,000, which has taken the average UK house price down to £173,583. The Nationwide, the UK's second-largest lender, said seasonally adjusted price falls were now accelerating and had continued for seven months in a row. In March, new mortgage approvals for home buyers were at their lowest since the Bank of England's records on the topic began back in 1993.