Friday 11 March 2016

Some consumption decisions could be independent from budget


The companies with high profit margin products must have done research on how discount offers affect people's consumption decisions. We all have some experience of consuming some products because their offers are too nice to be rejected, even sometimes we do not necessarily need them. Being informed about the discount offers is important. When we are informed about the pre-discounted price, we may raise our expected value of one good and decide to consume it. However, if we are offered a discount but not informed, we are less likely to consume the good as our expected value does not change. Moreover, when we are making individual consumption decisions, we do not usually consider about the budget constraint. We do care about prices, but make individual consumption decision based on if the price matches the utility the good gives us. Therefore, when we think about individual consumption decision, it is not a question of utility constrained by budget, instead it is a question that whether the price could match the utility the good provides. From logic, budget is determined by income, then budget will then be split into small parts of individual expenditures, we decide our consumption based upon these small parts. However, in reality, we have a big image of our budget, but we make individual consumptions relatively independent of the budget, unless the consumption requires a significant portion of the total budget. To conclude, when people's incomes increase, their consumption decisions made might become more independent from their budgets, and vice versa.

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