Prudent buying requires a lot of planning considering the income levels vary greatly among the various income brackets. When purchasing appliances, a house or a vehicle which requires monthly payments, it is wise to check the market forces which are the interest rates and inflation. In the past decade, the world economy has changed in many lengths considering the global economic recession and the accelerated economic growth of many countries after that. The growth of these economies can be attributed to several factors such as democracy and economic stability which attracts investors who are the source of economic growth. It is a fact today that purchases of non perishable items vary to a great extent compared to income and they are dependent …show more content…
When inflation is high, the fiscal policy which is generally the interest rates are adjusted upwards in order to caution the economy and opposite happens when inflation is low. The effect of inflation and consequently the interest rates is direct because an increase or decrease of a single percentage means that the product will not have the same price. When inflation is at its lowest is the best time to make purchases because the interest rates will be fixed until the final payment is made. However, this is not the case with mortgages especially where there is need to …show more content…
For example, during the recession, the housing market in the US was in near collapse with many buyers holding back due to the high interest rates. The result was that there were very few purchases which forced the realtors to bring down prices. The force down on the prices indicates the drastic effects that inflation can impact on the economy. Initially at the start of the inflation period, the supply is low as result of the increase in inflation but later the demand goes down because of the reduced purchasing power.
Despite the demand going up, the suppliers can regulate the supply in order to have high prices but naturally when the demand goes up, supply goes down. On the other hand, the demand and good economic times can spur growth of other manufacturers which can lead increased supply forcing the demand and the prices down.
When making a decision to buy or not to buy, there are several factors that the buyer looks into because consumer reaction towards inflation is imperative. Despite inflation levels, consumers greatly determine the demand levels of any goods or services. Changes in consumer spending are determined by the inflation and interest rates and affect the investments which can negatively or positively impact the economy. It is important to note that inflation directly impacts on the purchasing power which is the amount one can buy with the currency at any one time. The quantity or quality
When interest rates on loans are high, this leaves people with less disposable income resulting in less consumer spending. Depending on where the economy stands, this can be good or bad, as it would lead toward recession. But that may be exactly what is intended in order to decrease spending if the economy is currently experiencing over-inflation. The government may intentionally send the market into a recession rather than potentially risking too high levels of inflation. On the other hand, if the economy were already in recession this would only make the recession worse. In the situation where the economy is currently in recession, the government is instead going to change the overnight rate in order to therefore lower interest rates on loans in order to provoke consumer
Generally it is well known in economics that purchasers always want to maximize their utility levels. The maximum utility is given by the formulae of max U = f(C, C’) being subject to the equation of future consumption {[Y – C](1+r) + W = C’ – Y’} . This is an important part for our assumptions since a customer would have problem determining his/her maximum utility for present as well as future consumption when faced with a certain lifetime budget constraint. The budget line represents the levels of consumption for both periods according to some factors such as present and future income as well as the interest rate level and has a slope of –(1+r ). Before considering the effects of a change in the interest rates it is important to understand the first step of the consumption model. In the diagrams A and B below, we can understand that (I) the indifference curves, act on behalf of the equal levels of utility satisfaction derived from different mixtures of present and future consumption. That being said the point (W), which is identified a...
In economics, a recession occurs when there is a slowdown in the spending of goods and services in the market. A recession causes a drop in employment, GDP growth, investment, as well as societal well-being. All recessions are caused by a specific cause, but the Great Recession of 2007-2009 was caused by a crash in the housing market. This crash was triggered by a steep decline in housing prices. All of a sudden, people bought houses because there was an excessive amount of money in the economy and they thought the price of houses would only increase. (Amadeo, 2012). There was a financial frenzy as the growing desire for homes expanded. People held a lot of faith in the economy and began spending irrationally on houses that they couldn’t afford. This led to overvalued estate and unsustainable mortgage debt. (McConnell, Brue, Flynn, 2012).
When decisions bases on a consumers finances have following consequences further than the near future, then an individuals' success economically could depend on the ability they have to foresee the upcoming rate of inflation. according to statistics, higher expectations for inflation were reported by females who were poorer, they were single and they were less educated. More specifically, higher expectations for inflation were reported by people who focused more-so with how they can cover future purchases and expenses and the prices they will pay, and by ones who have lower knowledge on financial literacy.
The law of demand states that if everything remains constant (ceteris paribus) when the price is high the lower the quantity demanded. A demand curve displays quantity demanded as the independent variable (the x-axis) and the price as the dependent variable (the y-axis). http://www.netmba.com/econ/micro/demand/curve/
As shown above, crisis increases demand for the product leading to a shortage. Supply does not change. Equilibrium price now shifts to the right and increases. The market is now ready and willing to pay for the product or service at a higher price. Upon seeing long of people waiting for the product, sellers either hike the price or bring in more supplies if it were possible. If more suppliers are brought, equilibrium price goes back to normal. If supply cannot be increased, sellers increase the price of the product or service.
A change in quantity supplied is just a movement from one point to another in the supply curve. In opposite, the cause of a change in supply is a change in one the determinants of supply that shifts the curve either to the left or the right. These determinants are the resource prices, technology, taxes and subsidies, producer expectations, and number of sellers. An equilibrium price is required to produce an equilibrium quantity and a price below that amount is referred as quantity supplied of zero no firms that are entering that particular business. If the coefficient of price is greater than zero, as the price of the output goes up, firms wants to produce more of that output. As the price of the output goes up it becomes more appealing for the firms to shift resources into the production of that output. Therefore, the slope of a supply curve is the change in price divided by the change in quantity. The constant in this equation is something less (negative number always) than zero because it requires strictly a positive...
the empirical relations based on the VAR test conducted for the period 1990 to 2009 show that, Money supply and inflation are weakly positively correlated, Money supply and interest rates are very weakly and negatively correlated, Money supply and real GDP are strongly positively correlated, Money supply and nominal GDP are very strongly negatively correlated. Furthermore, the response of inflation to shocks in money supply is very weakly positive or has no effect since it is constant through out. This indicates that the relationship between money supply and inflation is not too significant.
In conclusion, generally speaking the Law of Supply states that when the selling price of an item rises there are more people willing to produce the item. Since a higher price means more profit for the producer and as the price rises more people will be willing to produce the item when they see that there is more money to be earned. Meanwhile the Law of Demand states that when the price of an item goes down, the demand for it will go up. When the price drops people who could not afford the item can now buy it, and people who are not willing to buy it before will now buy it at the lower price as well. Also, if the price of an item drops enough people will buy more of the product and even find alternative uses for the product.
In the automobile industry, there are factors that cause a shift in the supply and price elasticity of the supply and demand. These factors can cause the supply demand to reduce or raise the demand for the automobiles. One factor to consider is if the price of steel rises. Automobile manufacturers will then produce fewer automobiles at all different price levels and the supply curve will then shift. Another factor to consider is if automobile workers decide to go on strike for higher wages. The company will be forced to pay more for labor to build the same number of automobiles. The supply of these automobiles will decrease. Lastly, another factor that can curve a shift in the supply curve could be if the government imposes a new tax on car manufacturers. In all of those cases, the supply curve will move because the quantity supplied is lower at all price levels.
Inflation; ‘a situation in which prices rise in order to keep up with increased production costs… result[ing] [in] the purchasing power of money fall[ing]’ (Collin:101) is quickly becoming a problem for the government of the United Kingdom in these post-recession years. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public. This, in turn, reduces demand for goods and services, and could potentially plummet the UK back into recession. This essay discusses the causes of inflation, policy options available to the UK government and the Bank of England (the central bank of the UK responsible for monetary policy), and the effects they may potentially have on the UK recovery.
As an aftereffect of inflation, the purchasing power of a unit of money falls. For instance, a pack of gum that costs $1 and if inflation rate is 2% then in a given year will cost $1.02 the following year. As products and services require more cash to buy, the implicit value of that currency falls.
Inflation is one of the most important economic issues in the world. It can be defined as the price of goods and services rising over monthly or yearly. Inflation leads to a decline in the value of money, it means that we cannot buy something at a price that same as before. This situation will increase our cost of living.
...n the companies will have to decrease the price otherwise the product will not be sold at higher prices and the revenue would not be as large as companies would like to.
Knowledge of purchasing power: Consumer “purchasing power measures the value in money for which consumers may purchase goods or services” (Garman & Forgue, 2000, p. 9). It is related to the standard of living, the rate of inflation, income, our ability to buy and other. The standard national survey conducted by the Bureau of the Census for the Bureau of Labor Statistics measures the prices of goods and services by recording the rise or fall in prices of a number of chosen items for a specific period of time, to provide the best estimate of consumer purchasing