This is a short excerpt from my latest work in progress. I thought some understanding of Consumer Demand is needed by all, do I posted this article.
Consumer Demand stands as a simple concept: The aggregate desire for Goods and Services expressed by all Consumers in the Economy. All includes Business elements and Government in the matrix, not just End-Consumers of these Goods and Services. Business competes with private Consumers through the process of Investment and Resource Demand. Older Economic analysis equated hard capital investment to be a direct reduction of private End-Consumption. Current Economic analysis has developed several theories which modifies the older analysis, insisting reductions of Investment actually decreases End-Consumption Demand. This modification has proven to be statistically accurate. Capital equipment and facilities provision Sectors are high-Wage Sectors generating greater Consumer Demand, than is diminished by Investment; through loss of income by reduction of Profits distribution, Interest payments, and higher Goods pricing. Government duplicates private Consumption by purchase of Goods and Services for welfare programs, and imitates Business investment by entering into Infrastructure construction.
The essential elements to Consumer Demand consist of desire for Consumption, with the second condition of ability to pay for that Consumption. The desire for Consumption must contain the willingness to consume at the Prices demanded for that Consumption, this establishing the Price schedule for Goods and Services. The willingness to consume diminishes as the Price of such Consumption increases. This willingness increases as Price reduces. Everyone would like to drive a Cadillac or Porsche, but Few are those willing to detail such a amount of their total income for the provision of personal transportation. Most are willing to accept a cheaper substitution, even though Consumption satisfaction may not be as great. This presents a fundamental economic theory of Economics: Consumers will transfer to more unsatisfactory substitute Goods and Services with increase in Pricing.
This Principle need be examined in greater detail. Willingness to consume at a specific Price can be designated as the desire to allocate a certain net percentage of Consumer Income for the specific Good or Service. This is a personal desire on the part of the Consumer, and can be generated by many motives. The allocation procedure, though, remains highly dependent on the Economic factors of largesse of Income, or ability to fund Consumption by borrowing; also finally dependent upon the largesse of Income. It is also highly dependent upon the Consumer’s perception of the state of his total Income. This view is not wholly chaotic, as many Laymen and some Economists insist. It consists of many parts: the Consumer’s expectation of increase or decrease of total Income, his belief of Product pricing increasing or decreasing as percentage element of his total Income, and his belief that unavoidable Expenses are an increasing or decreasing net percentage of his total Income. The actual alteration of Product pricing and Expense affects the first factor of Consumer willingness, while the more subjective second factor is deeply influenced by Public perception of the state of the total Economy.
Switch to more expensive Goods and Services is much less rapid than is the process of transfer to cheaper substitute Goods and Services. The basic rationale for this statistically proven fact derives from the inability to switch to more expensive Products; almost completely dependent upon actual increase of total Income or ability to borrow for Consumption; still innately tied to limits of total Income. Switch to cheaper Goods and Services is not dependent on actual increase or decrease of total Income, simply on perceptions of potential alteration of total Income. The former switch actually lags behind increases in total Income, with some period of delay. The latter switch often proceeds actual decreases in total Income, and may even occur where there is no decrease in total Income; possibly even in the presence of total Income increases.
The Banker worries about actual changes in total Income, as does the Consumer; the Economist must worry about Consumer perceptions of the Economy and it’s performance. Actual statistics indicate Consumer Demand of the Consumer will lag Eleven months behind actual net increases of total Income, in that average Consumer Demand for each specific Income level will not be reached for that period of time. This Consumer Demand rises to the Income level average only with expectation that the net increase will be maintained. The period time lag can be lengthened by Forty-Eight months, if this expectation does not exist. Perceived threat of decrease of total Income can proceed actual reduction of Income by Four months, and can continue for Forty-Eight months without any actual reduction of total Income. Such is the power of Consumer perception of adverse effect on their Income levels.
Economic examination of these conditions brings depression to both Economist and Businessman. Economic performance insists on high, consistent Consumer Demand. Several Economic studies express clearly there must be a switch to more expensive Goods and Services by Consumers, in order to maintain an Economic Boom past Twenty months. It has already been indicated there is a Eleven month lag behind actual total Income increases, before this switch will normally occur. This lag will be lengthened, if Consumer perceptions doubt actual maintenance of total Income increases. The Businessman and Economist must convince Consumers of continued good economic performance within Twenty months, or an Economic Boom will not be maintained. They have to convince Consumers that life is getting better, and is going to stay that way for a considerable period of time.
The reciprocal also expresses itself adversely. Consumers will switch to cheaper substitute Goods and Services at signs of poor Economic performance, which could impact their lifestyle poorly. The major factors which incite such a switch remain threat of total Income loss through Layoffs or loss of Overtime, increased unavoidable Expenses, increased Interest rates on Consumer credit, Product price increases, and Business suppression of Wage increases. The Student must remember a Consumer will switch to a cheaper substitute prior to a total Income loss, and will not switch to more expensive Product until proven total Income increases have been in place for about Eleven months. An Economic Boom can only be maintained for Twenty months, without switch to more expensive Products by Consumers. Such a Boom will be killed within Three months of a switch to cheaper substitute Products. The turnaround time from Economic Bust to Boom requires Eleven to Fifteen months, if the Consumers believe their lifestyle is improving; due to the lag of switch to more expensive Product behind net increases in total Income.
Government, Business, and the Economist cannot hide actual economic statistics from the Consumers. They will react in a negative manner, if poor economic performance is indicated; with potential switch to cheaper substitute Products. Advertising, or Propaganda campaigns, will not work effectively to dissuade Consumers from this negative behavior; if adverse economic conditions continue for longer than Three months. Government, Business, and Economist must counteract adverse economic conditions within Ten months of their inception, else favorable economic conditions will be destroyed; with the Economy entering into a Recession. The Economist can only advise Government and Business; whose actions are necessary to forestall those adverse economic conditions, before an Recession occurs.