What is Consumer Purchasing Power? What are the factors affecting it?

consumer purchasing power

Table of Contents

“Purchasing Power is the License to Purchase Power.” -Raoul Vaneigem

WHAT IS CONSUMER PURCHASING POWER?

Consumer purchasing power is the value of money with the consumer with which she/he can buy goods and services.

Purchasing power is basically the number of goods and services a consumer can buy in one unit of currency. It can be most relevantly measured for changes over time.

It is related to the Cost of Living Index. This indicates how much loss or gain can affect the consumers’ ability to purchase goods.

Purchasing power is important for marketing as it indicates how far can their currency go.

For example, if the cost of a commodity was ₹200 two years ago, and now the same commodity costs ₹500, consumers have seen a fall in purchasing power. 

If the cost of commodity was ₹500 two years ago and now it is ₹200 then consumer purchasing power has increased.

Also, check this out – What is the consumer buying cycle?

FACTORS AFFECTING CONSUMER PURCHASING POWER

There are various factors that affect consumer purchasing power. 

Some of them are giver below – 

  1.  INFLATION AND DEFLATION

The prime reason behind the change in consumer purchasing power is the change in price due to inflation and deflation in a country. 

Due to inflation economic sectors witnesses, a rise and it reduces the purchasing power of the consumers to buy commodities at the existing income levels. Inflation must be counterpart by increasing income level.

Whereas, deflation refers to the fall in prices of economic sectors which in turn raise the purchasing power of the consumer.

  1. PRICES

the cost of goods and services keeps on changing over time. Prices are analyzed by tracking the price of a consumer’s basket of consumer goods and are usually calculated by Consumer Price Index (CPI). When the price of commodities goes up, the purchasing power goes and vice versa.

consumer purchasing power
  1. TAX

Consumers receive income after all taxes have been deducted from it. This makes the difference between original income and in-hand income considerably vast.  So higher taxes leave lesser money with the consumer and hence reduces their purchasing power.

  1. PRODUCT’S SUPPLY AND DEMAND

This directly links to the price of products or services. When a certain product is in demand, companies start to produce it in more quantity or start selling unsold inventory. This leads to falling product prices, which ultimately raises the purchasing power. On the other hand, when there are not enough goods to satisfy the demands of consumers, it leads to higher product prices and hence lowering the purchasing power of consumers.

  1. ECONOMIC DEVALUATION

When a company’s economy falls with respect to the other country the prices of products/ services of the latter country will be higher in the first company’s currency. This affects the businesses that have links with the suppliers in the second country for the import of goods and services. As businesses have to pay higher prices for supplies, ultimately they increase the prices of goods and services for the consumers to compensate for the losses. This reduces the consumers’ purchasing power.

CONCLUSION

The ability of consumers to purchase goods and services with their in-hand income is their purchasing power.

There are various factors affecting it. We have mentioned the following-

  • Inflation and Deflation
  • Prices of commodities
  • Tax
  • Supply and demand of products and services
  • Exchange currency.
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