MASTER OF BUSINESS ADMINISTRATION

2020-22

Term – IV
2021-2022

Consumer Behaviour

Course Instructor

Prof. Prantosh Banerjee

By

Group - 10

INDIAN INSTITUTE OF MANAGEMENT UDAIPUR

 Summary: Psychology and Consumer Economics

This paper consists of psychological analysis of consumer spending and saving behavior in
response of various economics factors such as inflation, recession, etc. And to do this analysis
first we need to collect the data which is majorly done through surveys.
The behavioral science study basically consists of developing low-level preliminary hypothesis,
testing them, revisiting the hypothesis as a result of the tests, and then testing a new hypothesis
and this continues. Instead of directly coming to the conclusions from various principles of
human nature behavioral scientist assumes that the outcomes may vary depending upon the
various conditions and circumstances. Instead of searching for a single necessary response to
change in various economic factor the behavioral scientist studies circumstances under which a
stimulus will produce a similar or different result.
The four-problem area are described this article as an example of results of difference in
methodology, mentioned as follows-
1. Inflation and Consumer Spending
The basic assumption by economists of rise in inflation is, firstly, when income increases
the demand and purchasing power of consumer also increases and it exceeds the available
supplies and general price level is likely to rise. Secondly, when people expect the prices
to go up, they start hoarding at prevailing lower prices, which in-turn increases the
demand more than the supply and leads to rise in inflation. And in inflationary period, it
is assumed that consumers substitute goods for money and tend to spend more and save
less. But recent studies have different indication in consumer behavior, most people
believe that inflation adversely affects their personal finances and also in general and
they termed these times as ‘bad times to buy’, while price stability makes for confidence
and stimulates buying. In general inflation makes postponement of discretionary
expenditure and reduces rather than increases the quantity of goods demanded. And the
rate of saving is therefore expected to increase in inflationary periods.
Furthermore, studies over many years revealed that income increase, and price increase
are viewed as unrelated things. People with large income gains do not feel compensated
for the ravages of inflation, and few see inflation as the cause of their income gains. And,
 inflation was found to be viewed negatively even by people whose income rose much
more than price advances.
To conclude, stocking up and buying in advance represent an immediate response to
some specific threatening development, whereas postponement of buying is a delayed
response to general malaise and uncertainty.
2. Personal Saving in Periods of Prosperity and Recession
In 1970 and 1071, during recession the rate of personal saving reached record levels. By
Keynes, savings is defined as refraining from spending the whole current income on
consumption. It is to be expected that in bad times when incomes are low and declining,
people use more of their income in good times and necessities, but conversely there is an
increase in savings. On the other hand, in years of economic recovery purchases of
durable goods and installment in buying tend to increase with that the net savings
declines.
3. Wealth and Saving
It is expected that larger the wealth the greater is the proportion of income spent and
smaller is saved but considering psychological consideration the conclusion about inverse
relation between wealth and amounts saved appears much less obvious. Firstly, some
saving is habitual or is influenced by such enduring personality traits as thriftiness. Those
who have saved in recent past are likely to save in future as well. Secondly, levels of
aspirations may rise with accomplishments so that acquisition of some reserve funds may
whet the appetite to save more instead of weakening the motives to save.
4. Saturation with Consumer Goods
It is observed that there is absence of saturation with growing saving and reserve funds,
with occupational progress, accomplishment of a goal may result in new desires and
ambitions. Rising aspirations are most commonly the result of wants and desire for new
goods and services after more urgent wants for other goods and services have been
satisfied.
Under present conditions economic incentives might be greatly reduce if air and water
pollution or threat of exhaustion of natural resources were to lead to limitation of growth.
Therefore, a redefinition of what is considered progress and of what serves as and
incentive for working hard is needed.