Back to Homepage Income Measures Income: Saving and Investment Methods of Buying That Save Money The Choice of Goods Methods of Buying That Reduce Mistakes In Selection Methods of Securing Information Concerning Goods Plans and Motives of Consumers Consuming the Product Who Is the Consumer? The Consumer in the Market Priorities and Preferences in Consuming Decisions The Consumer as User of Wealth The Consumer as a Buyer Consumers as Self-Conscious Agents Criteria of a Good Market Information Versus Persuasion of the Buyer The Rate of Interest Interest Rates and Economic Activity Saving, Investment, and Income Saving Motives Saving Plans and their Realization Total Spending Is the Key to Prosperity The More We Spend, The More We Have Spending by Private Enterprise

The Choice of Goods We know relatively little of the causes leading to the choice of goods. It is quite generally accepted that we start life with a certain inheritance of primitive fundamentals that are called instincts. There is no general agreement as to precisely what constitutes these instincts. Every book on psychology contains a list of them, and most of the lists differ; though instincts generally appear to comprise hunger, fear, rage, sex, gregariousness, etc. From these basic drives more complex reactions are built up from the experience of our environment. The learning process begins so early that it has been nearly impossible to differentiate between the part of our reaction that has been inherited and the part that is environmental. These instincts are, without doubt, of considerable importance in influencing certain broad lines of our expenditure, but they have little to do with our selection of specific commodities. The latter is primarily the result of our environment and seems to be made principally because of habit, impulse, or imitation, and only slightly upon the basis of any rational calculation. 1. Preferences of Consumers. The scale of commodities that a person consumes is built up in a more or less haphazard manner. Some of the commodities are acquired by a trial-and-error method. The consumer comes to expect a certain amount of satisfaction from a commodity from his previous experience with it. As has been suggested, certain commodities are included because other people are observed to be consuming them, and we think we shall derive something of the enjoyment that others seem to derive from their consumption; certain things widely consumed, whose omission in our consumption we believe would make us conspicuous, are also included. These are often consumed with but little feeling of satisfaction in the goods themselves. For example, many of the items of our apparel are uncomfortable, and if left to ourselves we would not choose to wear them; but in order not to appear conspicuous we comply with the whims of society. There is no common quality of goods that makes them desirable. Desirability is solely in the reaction of the individual to the good and depends upon the individual and his environment rather than upon the good itself. For example, certain people like olives and others do not. The difference is in the individuals and not in the olives. The power that certain goods have to satisfy a want is called utility by the economist. Since this utility is purely psychic, we have no direct measure of it. We can only observe the effects as they are observed in price, and, from these, draw certain inferences. Thus, if we observe that a man is in doubt as to which of two things to spend a dollar on, we may infer, without great error, that they have about equal utility to him, or if he buys one in preference to the other, that the purchased goods possess the greater utility to him. It is quite probable that each person derives a quite different satisfaction from the consumption of a particular kind of goods. This precludes any comparison of the satisfactions derived from the consumption of goods or a group of goods among different persons, or of any total or social summation of satisfaction. Moreover, since environment is constantly changing the individual, a person's desires at any one time may be quite different from those he has at some other time. There is not even any satisfactory unit of measurement by which an individual can compute the absolute amount of satisfaction that he derives from certain goods. This means that we cannot even sum up or total the satisfactions that a person derives from his income. A person calculates this satisfaction in terms of other goods. Thus it is impossible for one to tell another the satisfaction he derives from the consumption of a piece of candy or even to calculate it himself except in terms of other goods. One may, however, prefer the candy to a package of cigarettes or three packages of gum. Many psychologists and economists object vigorously to the notion that individuals are at all rational in their attitudes toward goods-that they make conscious choices among goods on the basis of the utility which they have for them. 1 Men's motives, they say, are little understood, are very complex, and cannot be accounted for in hedonistic terms. Human behavior, according to these men, is not rational but is determined largely by the environment or circumstances in which man happens to be placed. It is a product of an unstable, irrational complex of reflex actions, impulses, instincts, habits, customs, climate, and fashions. People do not, in other words, make fine and precise calculations respecting the probable satisfactions to be obtained from the purchase of various goods. They are influenced rather by suggestion, advertising, accident, and many other factors. Their choices and price offers are determined more by custom than the relative utility of goods. The truth of these statements cannot be denied. They hold true within considerable ranges of our expenditures, and in consequence the notion of the comparison of utilities cannot be pushed very far. But, at the same time, men are not completely irrational in the sense in which the man in the street uses the term. He does learn and build up a system of expenditures. He does select certain goods and thus choose in the ordinary sense of the word. Although these are serious limitations to the development of a satisfactory theory of consumption, they do not completely destroy the usefulness of the concept of utility. There still remain certain relations that may quite safely be stated and that lead us to concrete and useful conclusions. The problems of choice with which the economists are primarily concerned are conveniently illustrated through the device of indifference curves. The basic assumption is that in most cases the consumer may substitute one commodity for another--e.g., apples for oranges, Chevrolets for Fords, automobile for rail transportation, and so on. There is one group of exceptions to this general proposition where commodities are complementary. In such cases the consumer in using more of one good also uses more of the other. Examples are gasoline and tires, cups and saucers, and tables and chairs. For most commodities the consumer may use more of one and less of another as he wishes. 2. The Effect of Price on Choice. Nearly all goods used by the consumer are purchased in the market, and since the consumer has a limited income, he must choose among these goods and apportion his expenditure among the various lines. He cannot consume all. In consequence, he buys some goods at the ruling prices and eliminates other goods at the ruling prices. It is quite evident that the consumer is influenced in his purchase by the price of these particular goods. We observe that if the price of a certain good drops, more is likely to be sold, and if it rises, less. These reactions may not be immediate, but for the market as a whole are certain. The reaction of consumers to price is not, however, as immediate and precise as this analysis would indicate. Within a considerable range of price and period of time, and depending upon the particular good, individual consumers do not pay as much attention to changes of price as is often thought. They find from experience about what a certain range may be expected to be, and it is only when prices lie outside this range that any considerable thought is given to the matter. For example, a man may have come to consider from $8 to $10 as his range for shoes in the market. He may give no thought to paying either $8 or $10 for a pair. He has come to expect to buy shoes for approximately that price. If he should find shoes selling for $15, however, he will consider other courses of action. He may decide to make the old shoes last a little longer, buy the new shoes with the expectation of using them more carefully than the old ones, or buy shoes of lower quality. As has been suggested, the consumer is interested in deriving the largest possible satisfaction from the expenditure of his income. If he spends an excessive amount on one thing, he derives less satisfaction than if he had spent a portion of it for other things; for, as he expands his consumption of this particular thing, its relative significance per unit decreases and his dollars, in consequence, buy less satisfaction. He discovers that if he spends too much on this one particular line, he will not have enough to spend on other lines and he will feel quite definitely the lack of these goods. He learns with some definiteness the approximate amounts that can be spent on each thing. If a person has a fairly regular income, he is taught by this experience the possibility of buying a certain amount of satisfaction in the market from each dollar that he spends. This provides him with a crude measure for judging the desirability of purchasing goods. 3. The Effect of Income on Choice. The effects of changes in income may also be analyzed through the use of indifference curves. Usually an increase in income will lead to an expansion in the amount of commodities which the consumer is purchasing. These rates will vary among commodities and some study of them will be made in a later chapter. There are cases, however, where a smaller quantity of a commodity is purchased as the income is larger. Such commodities are known as "inferior" goods. They are largely consumed at low levels of income but replaced or partially replaced by goods of higher quality as income rises. Margarine is an example, and there are a number of others. In the majority of cases, however, consumption expands with a rise in income. Changes in consumption usually require some time. A very large part of most people's current income is spent without the possibility of a great deal of shift in those expenditures. Past commitments of various kinds project legal or moral obligations into the future. People become involved in such things as rental contracts on leased houses, purchase payments on homes, and debt payments that must be met if the family is to remain solvent. Other payments such as board and room, insurance payments, children's education, and so on create moral if not legal obligations. Such expenditures in the short run are largely automatic. As a person grows older a larger portion of the income generally comes to be obligated in such a fashion. One is likely to acquire family responsibilities and become increasingly aware of the necessity for provision for old age, as well as becoming more settled in habits. The younger age groups are certainly more susceptible to style and change in their pattern of expenditures than the older groups. The typical individual receives his income in installments at particular periods of time. The earlier parts of the income period find him more receptive to buying appeals than later. Stores are well aware of this and direct their advertising more heavily at buyers on and near payday. Each individual has a margin below which he does not consider it worth while to weigh expenditures. This margin will tend to be higher for those with large than for those with small incomes. The 25-cent tip, purchase of newspapers or magazines, or attendance at movies may fall below this level. The level will also change with the stage of the income period. Shortly after payday no thought may be given to the purchase of a $5 bottle of perfume, while later a 15-cent sundae may give pause. But even here there will be periodical checkups and firm resolutions by the individual or family not to dribble money away with "nothing" to show for it. Over a period of time thought thus comes to be devoted to expenditures, and the situation approximates that indicated by our indifference curves. The importance of a dollar to an individual depends not only upon the nature of the person, but a great deal upon the number of dollars which he possesses. The loss of a few dollars from the income of a poor family may cause intense suffering, whereas the same loss would be scarcely felt in the income of a rich man. We say, in consequence, although always recognizing that there are exceptions, that the dollar has much greater significance to the poor man than to the rich man. It is interesting to note that divisible articles, such as meats, are varied in smaller units in size and price in shops appealing to the low-income groups than in shops catering to those with higher incomes. The dollar itself may not be a sufficiently large unit to impress maladjustments in expenditure upon a person. This depends upon his income. 4. Limitations to Consumption. It is said at times that wants are insatiable. This, however, is not true. "No sound need is insatiable. The quantity of goods required to satisfy it completely is even smaller than might be expected. Consider, for example, the desire for knowledge. The mental receptivity of the masses is ordinarily very limited. Only a small minority aspires to better things. The great intellects whose aspirations are unbounded are few indeed. Even a Faustian intellect is satisfied by the known truth and is insatiable only in the sense that it searches in ever new directions and kindles new needs. "There are degenerate needs that demand new sensual pleasures and constant change of refinement. Such needs are creative in augmenting new methods of enjoyment. But wherever man is influenced only by his own being, human nature prescribes narrow limits which cannot permanently be exceeded. Desires are only inflated to immeasurable proportions when the social degenerations of variety and love of fame are brought to bear." This concept becomes much more practicable when, assuming a certain structure of society, one looks for the specific factors limiting consumption. In addition to the limitations of income and of physical satiety, one discovers many factors which affect the wants of individuals.   Home