Consumer and producer decision-making in economic analysis

Economics is the study of normal, or in more appropriate words, rational human behavior. It discusses human undertakings and attempts to fulfill and satisfy both needs and wants. People have to make certain choices regarding their money as they face the problem of possessing inadequate means for fulfilling their desires. It means that the equivalent collection of limited resources i.e. The discretionary income owned by a consumer is used for all types of consumer disbursements (Du & Kamakura, 2008).

Expenses of consumers in a specific industry can be considered accordingly by comparing their expenditures in other industries. It is a general conception among marketers that their participation is individually recognized in comparison with other related industries. However, it is extremely important for them to understand the consumer behavior while the consumers make trade-offs between meeting consumption needs of various sorts with a certain amount in hand. Environmental changes like escalating gas prices or tax rebate also influence the expenditure as consumption budget is reallocated by the consumer as a response to these changes. Every individual family unit makes trade-offs when faced with budget limitations. Depending on life stages and income levels, families have continued changing preferences for different industries (Du & Kamakura, 2008).

A study has been conducted by Du & Kamakura (2008) that tells us about the decisions of individual households regarding budget allocation for a wide-ranging set of expenditures. Rational consumers take a number of steps in order to optimize their spending of discretionary income. It has been found out that escalation in the prices of gas has a greater impact (leaving behind other expansive economic factors) on the behavior of consumer when they shop for grocery. Consumers tend to budge from one retail system to another. Private labels are preferred over national brands. Promotional products are chosen rather than the one which have a regular price. Also, lower-priced tiers are purchased more often than the highly-priced ones (Ma, Ailawadi, Gauri, & Grewal, 2011).

Rational consumers find ways to reduce expenditures and optimize their 'optional' income when they notice sharp increase in gas prices. In such scenarios, consumers feel significantly helpless as they have a lesser amount of disposable money. Naturally, consumers become price conscious. Consumers find it easier to adjust their purchases while doing grocery shopping as this chore is a frequent one. Consequently, unforeseen changes in discretionary income are trounced by adjusting expenditures on grocery products. This step proves to be a significantly flexible one as consumers optimize their spending of discretionary income by taking it. To save money on grocery expenditures by and large, regular shelf-prices are ignored by the consumers and they shift towards promotional items (Ma, Ailawadi, Gauri, & Grewal, 2011).

Total purchase volume is also affected by gas prices which lowers the disposable income. These escalated prices pressurize consumers to buy and consume a reduced amount of needed items. Rational consumers optimize their discretionary income by trying to eat at home than going to restaurants. They tend to spend more time at home in order to save gas. (Ma, Ailawadi, Gauri, & Grewal, 2011). Thus, it is understood at this level that families experience a number of potentially transformative events with the passage of time which influence their budget (Epp & Price, 2008).

Another step that is usually taken by the rational customers to save money is the reduction in travel costs. Accordingly, there are lesser trips for shopping purpose. Consumers with stumpy search costs, though, make better use of promotional offers and shop frequently which helps them in saving money. Families having children are likely to shop more often at supercentres rather than grocery stores. The presence of children in the family means that the family would have elevated necessities and requirements. Such households are fascinated by one-stop shopping so they tend to switch more than others to supercenters. Mid and top tier brand shares are reduced by the consumers too. When they need to take a trip beyond to shop, they increase bottom tier brand shares to do so (Ma, Ailawadi, Gauri, & Grewal, 2011).