Economics: principles, theories, and applications

Economic Concepts

Purchase of any item may be an ordinary activity for most people, but in economic terms, it is probably one of the most significant activities that govern and shape the business cycle and affects the economic conditions of any organization or country. Purchasing is directly connected with the concept of consumption. The more a person purchases, the higher is the rate of consumption and vice versa. But purchasing or consumption, for that matter, doesn't take place in isolation and several different concepts come into operation when a single consumption activity takes place.

Let us illustrate this with the help of an example. Suppose a couple decides to purchase a car. On the surface this might be an ordinary everyday transaction where money goes from one party to another as the result of which ownership changes. The car becomes the property of the consumer while his money becomes addition asset of the organization from which the car was purchased. But this seemingly ordinary purchase is governed by several different economic concepts, which affect and are affected by the transaction that takes place. When a consumer decides to buy a car, he would unconsciously calculate marginal utility of the item before he actually purchases the car. Marginal utility refers to the gain or benefit that a consumer derives from an additional unit of any good. This also shapes his decision to buy a certain model or brand and will also decide how much he will be willing to pay for that item. The greater the marginal utility of an item, the more interested he would in purchasing it. This gives the seller an edge too as he knows that the consumer is in dire need of the new item. On the other hand, with lower marginal utility, consumer would have an edge over the seller because he would be less interested in purchasing the car and might not be willing to pay a very high price.

Product differentiation also affects a consumer's decision to purchase a certain make or model. The more attractive an item is and the more features it offers, the better are its chances of attracting the consumer. For example, with several different models and designs available in the showroom, the customer would be more interested in the model with attractive features and the one that suits his needs. Similarly brand name plays an important role too. It is seen that often the consumer looking for a second car would pay more attention to the brand and make of the car than someone buying his first car. Therefore product differentiation would play a dominant role in the final buying decision. Every person is looking for maximization of utility when he purchases an item. And for this reason consumer would buy the car that most suits his needs and therefore would pay close attention to the features. He might not be solely interested in brand but would also consider other things such as design, price, suitability, reliability etc. when making his final decision. Thus product differentiation is seen as an important tool for shaping the consumer's buying decision.