Economic model of consumer behaviour

This theory was first advanced by the economists. They gave formal explanation of buyer behavior. According to this theory the consumers are assumed to be rational and conscious about economic calculations. They follow the law of marginal utility. An individual buyer seeks to spend his money on such goods which give maximum satisfaction (utility) according to his interests and at relative cost. The desire of consumers to obtain maximum gains by spending a minimum amount acts as the core for the derivation of this model. The economic model assumes that there is close similarity between the behaviors of buyers and that a homogenous buying pattern is exhibited in the market. The model is based on Income effect, Substitution effect and Price effect.

A. Income effect:

Income effect substantiates that when a person earns more income, he will have more money to spend and so he will purchase more. The economists attempted to establish relationship between income and spending. Disposable personal income represents potential purchasing power that a buyer has. The change in income has direct relation on buying habits. Personal consumption spending tends to both rise and fall at a slower rate than what disposable personal income does. Disposable of personal income depend on various situations such as:

a) Size of family income

Size of family and size of family income affect the spending and saving patterns. Usually large families spend more and small families spend less in comparison.

b) Income Expectation

The income expected to be got in future has direct relation with the buying behavior. The expectation of higher or lower income has a direct effect on spending plans

c) Tendency to Spend and to Save

This is related to the habit of buyers to spend or save out of the disposable income. If the buyers give importance to the present needs, they dispose off their income. And buyers spend less if they give importance to future needs.

d) Liquidity of Funds

The present buying plans are greatly influenced by liquidity of assets readily convertible into cash. For example, readily marketable shares and bonds, bank balances come into this category. However, this convertible assets influence offer freedom to buyer, who actually buys with current income.

e) Consumer Credit

Facility of consumer credit system - hire purchase, installment purchase etc., plays an important role in purchase decision. A buyer can command more purchasing power. ‘Buy now and pay later’ plays its role effectively in the rapid growth of market for car, scooter, washing machine, furniture, television and so on.

The economic model of consumer behavior is uni-dimensional. It is based on certain predictions of buying behavior. They are:

a. Lower the price of the product, higher the sales

b. Lower the size of the substitute product, lower the sale of the product

c. Higher the real income, higher the sales of this product

d. Higher the promotional expenses, higher are the sales

However, ‘lower the price of a product, higher the sales’ may not hold good as buyer may feel that the product is sub-standard one.

The behavioral researchers believe that this model ignores all the other aspects such as perception, motivation, learning, attitude and personality, and socio-cultural factors. Further, it is also observed that consumer also gets influenced by other marketing variables such as products, effective distribution network and marketing communication. Hence, it is felt that the economic model is inadequate. It assumes that market is homogeneous where markets are assumed to be heterogeneous.

B. Substitution Effect

Substitution effect substantiates the fact that if a substitute product is available at a cheaper cost, then the product in question will be less preferred or less utilized by people.

C. Price Effect

Price Effect suggests that when the price of a product is less, consumers tend to purchase more quantity of that product.