Income and price for commodities are some of the factors that influence consumer demand. Therefore, changes in prices and levels of income make consumers react by adjusting their buying and consumption behavior. The choice and level of consumption can be determined by a change in either income or prices or both. If the prices of commodities such as gas, cars, and houses increase and income remain constant, consumers will reduce their demand for these goods (Waterlander et al., 2019).
For example, individuals owning private cars will use public means of transport, which is cheaper, because of increased fuel prices. Consumers have an incentive to purchase more relatively cheap goods and services (Huang et al., 2017). Equally, people will lower their demand for cars and houses due to high prices. Conversely, consumers would react by using private cars and buying more houses and cars when prices of the commodities decrease.
Consumers can react differently to changes in their income while prices for commodities remain constant. An increase in consumers’ income means that they have more buying power (Friedman, 2018). Such positive change triggers higher demand for goods and services because people will tend to consume more of the latter. For instance, consumers would react by buying more cars, and houses, and frequently using private vehicles as their income increases. Contrariwise, a reduction in consumers’ income will force them to lower their demand for cars and houses (Georgarakos, 2018). On one hand, both income and prices can simultaneously increase or decrease. In such cases, consumers’ budgets may not be significantly affected, and their demand for, for example, houses and cars, is likely to remain the same. On the other hand, car prices can rise while the cost of houses remains constant. Consequently, consumers’ demand for houses would be higher than for cars.
References
Friedman, M. (2018). A theory of the consumption function. Princeton University Press.
Georgarakos, D. (2018). Do consumers respond symmetrically to positive and negative income shocks? [Ebook] (pp. 1-4). Web.
Huang, A., Dawes, J., Lockshin, L., & Greenacre, L. (2017). Consumer response to price changes in higher-priced brands. Journal of Retailing and Consumer Services, 39, 1-10. Web.
Waterlander, W., Jiang, Y., Nghiem, N., Eyles, H., Wilson, N., & Cleghorn, C. et al. (2019). The effect of food price changes on consumer purchases: a randomised experiment. The Lancet Public Health, 4(8), 394-405. Web.