Consumers tend to maximize utility while minimizing cost when purchasing a product. A change in a product’s price influences a consumer’s purchasing decision. The decision to consume less occurs for two reasons; the substitution effect and the income effect. The substitution and income effect cause a change in the number of products consumed, known as the price change effect. The substitution effect occurs when consumers consume fewer products with higher prices and more with lower costs (Önder et al., 2019).
In this case, a consumer can purchase a product with a lower relative price when the price of one commodity increases. The income effect is that higher prices result in a decrease in the buying power of income (even though actual income has not been reduced), which leads to buying less of a product. An increase in the price of a commodity causes a decrease in a consumer’s disposable income, while a reduction in price increases a consumer’s disposable income. Consumers purchase more of a product with the same income when prices reduce.
Total utility and marginal utility affect consumers’ choices when the budget constraint shifts due to a change in income and pricing. Total utility measures an individual’s satisfaction from consuming a specific quantity of a good or service. Marginal utility is the satisfaction from consuming one additional unit of a product or service (Lin et al., 2022). Higher prices of specific commodities result in reduced consumption of the product in question but can also increase consumption of other products. For example, a customer’s choice when purchasing peanut butter and jam can be affected by an increase in the price of jam. A consumer may choose to purchase more peanut butter compared to jam due to the price change (Waterlander et al., 2019). A price change can result in consumers buying alternative products that cost less. Changes in income and pricing significantly impact a consumer’s purchasing power.
References
Lin, C. C., & Peng, S. S. (2022). A Rehabilitation of the Law of Diminishing Marginal Utility: An Ordinal Marginal Utility Approach. The BE Journal of Theoretical Economics, 22(2), 453-481. Web.
Önder, K., & ALKAN, H. I. (2019). An Investigation of Income and Substitution Effects on Female Labour Supply Through a Chaid Analysis: The Service Sector Case Specific to the TR51 Region. Uluslararası Yönetim İktisat ve İşletme Dergisi, 15(1), 14-29. Web.
Waterlander, W. E., Jiang, Y., Nghiem, N., Eyles, H., Wilson, N., Cleghorn, C.,… & Blakely, T. (2019). The effect of food price changes on consumer purchases: a randomized experiment. The Lancet Public Health, 4(8), e394-e405. Web.