Increase in oil prices will influence on the economy negatively. Its effect on economy can be evaluated through the consumer behavior, i.e. high oil prices will scale the cost of living high since most people depend on the oil either directly or indirectly, as almost everyone uses fuel to reach the destination.
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Hence the increased price in the market will influence consumers purchasing decision and power. Consumers have a realm they can spend their money on and which well dictates what consumers’ budgets entail. With an increase in prices of commodities being proportional to a decrease in purchase from the consumer population, the price elasticity, as dictated by the law of demand, will have an effect. (Assael 234)
Impact of oil prices on consumer behavior in Turkey
Since oil prices affect the overall prices of commodities in the economy, the purchasing decision of consumers will be generally affected, thus changing consumer behavior.
What generally dictates the consumer behavioral change with regards to change in prices?
4Ps (Product, Place, Price, Promotion)
Product: The kind of product will generally influence the buying decision of a consumer. For example, if a product is not necessary, then the consumer is likely not to buy it. But if it is a basic need, the consumer behavior is likely to be influenced by other factors such as knowledge, personality, motivation, attitudes, beliefs, feelings, experience, income level, personality, age etc. in making decision on whether to buy a specific product or not. The product may also be judged based on quality and quantity. (Mehra 231) Highly priced products and high quality products are likely to influence the behavior of consumers who are likely to opt for the same products at the expense of alternative products but of low quality.
Price: elasticity of a product may also be largely affected by price, the higher the price of a commodity the lower the purchase decision by consumers. Hence, price of a commodity will largely dictate the purchasing behavior of the consumer or alternatively, the consumer is likely to consider a substitute option for the product. But high price does not necessarily mean low purchasing decision. This is because from the consumer point of view, high price of a product may mean high quality, and a low price is relative to poor quality. This prompts the buyers to take to the high priced commodities with the idea that they are of a higher quality.
Place: The accessibility of a product may also influence the consumer behavior (Jorgenson 56) in that consumers are likely to purchase goods which are easily accessible. E.g. consumers in a particular locality are likely to be dependent on the products which are locally available than products that are likely to increase the expenditure at the time of their procurement. But this is relative to the income potential of the consumer. (Sorhone 2010)
Promotion: The available information on a particular product is likely to influence the consumer behavior in that a consumer is likely not to purchase a commodity which is not popular, for example, well known to the public due to publicity through advertising, promotion through sales; consumer public relations and personal selling are likely to influence the consumer behavior to purchase a particular product.
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This can be represented in the graph below:
The graph explains three major aspects:
Reducing the cost of a good, the purchasing tendency of the consumer increases. Thus, the consumer can buy the same measure of good with less money or may purchase more of the same measure with the same amount. Consequentially, if the price of the good increases, it is equivalent to decrease in income of the consumer as now there is an increased expenditure for purchasing the same measure as before, hence the income effect. (Ramahi 2012)
With decrease in the price of a commodity, it’s relatively cheaper as weighed against commodities which prices are stagnant. Thus, the consumer behavior is likely to shift and consume much of the commodity at reduced price i.e. the commodity acts as a surrogate to other commodities which prices are still stagnant. (Krugman 132)
Diminishing marginal utility
It explains that as an entity, consumes are the components of a product, the utility benefited from it continues to decrease, and for outmost benefits, the consumer makes a decision to make a purchase to achieve cost benefit i.e. the utility level to be equal to the cost of the commodity. Hence, for a consumer to purchase larger quantities of a product, the price must be affordable to the consumer. (Mehra 67)
Although there are some exceptional situations
For goods which are bought mainly for their snob appeal e.g. air conditioners, lavish cars, old-fashioned paintings etc. which may be purchased to depict ones income or wealth, their demand increases with the increase in price and low demand which is a result of a decreased price.
Also, with the purchase of the inferior goods which income effect is stronger that substitution effect, an increasing price is proportional to high demand and vice-versa.
As it has been assumed, the consumers have a tendency to buy less and less of a given product with the assumption that the product’s price is likely to fall in the nearest future. But when the consumers have an assumption that the product’s price is likely to rise in the nearest future, the consumer will tend to buy more and more of that product.
Factors influencing elasticity of demand in Turkey in relation to increased oil prices and subsequent consequences on the market with regards to consumer behavior
Since oil prices will have a greater impact on the price of commodities in the market, the elasticity of demand may be influence by the following factors:
Availability of alternative products
Availability of substitute products is likely to influence the elasticity level which will be relatively high. E.g. with increasing price of a commodity, the availability of substitute products is likely to influence the consumer behavior and shift it to the alternative one, which has a relatively minor price. If there is no quick substitute of an increased price of a product, the demand will be inelastic and its substitution level will be low. (Mankiw 75)
Percentage of income
High percentage of income on the consumer side, which is proportional to the price of the product, will have the higher elasticity, this is because the consumers will be considered when purchasing the commodity, but when the price of the commodity affects only an insignificant percentage of the consumer’s budget, the income effect is negligible and results into the inelastic demand.
The more basic a product is to a consumer, the lower the elasticity. This is because the consumers are tent to procure the product despite its price. E.g. basic foods are likely to be purchased by consumers regardless of the price unlike other luxurious products which affect the consumer life indirectly. (Mankiw 2006)
Due to the push among the consumers to find adequate time to get substitutes of a product, an increased rate of elasticity is anticipated (Szmigin 235). This happens for most products that are of utmost interest to the consumers.
E.g. when oil prices raise unexpectedly, the consumers will still be filling their tanks for a while, but if the tendency prolongs, the consumers will definitely find alternatives, for example, using economical means, such as communal transport incase of transportation, hence one elastic demand is likely to increase in the long run.
Definition of breadth of goods
A minor elasticity is experienced where there is a broader spectrum of services and products. E.g. companies manufacturing similar products are likely to face high elasticity level of demand, this is a result of the range of substitutes that are available. As compared to products such as food stuffs, they are likely to face low elasticity level because there is no the range of substitutes to it. (Blanchard 76).
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The consumer may become less insensitive to the price change when he/she is strongly attached to a certain product. This is likely to result in more inelastic demands since they might be blinded by the attachment to a particular product.
This tendency may also occur when the market economy is monopolized by a particular product. The dominance of the product in the market may make the consumer’s loyal to that particular brand and be blinded from noticing the existence of other similar products in the market. (Baumol 2011)
Where the consumers are not directly involved in the payments for the goods they consume e.g. under business outflow accounts demand characteristic is likely to be inelastic. This instance happens when much of the consumption or the potential consumers of a particular product are corporate institutions/businesses. Hence, payment responsibility and elasticity demand are dictated by the composition of the consumer population. (Barro 2008)
Ideas of how to research and develop the thesis
First, the research is aimed at understanding price elasticity, then how oil price impacts the aggregate economy when it is increased or decreased.
By looking at the factors that generally dictate the consumer behaviors with regards to increase in oil prices, the analysis will be looking into these factors and analyze some contributing factors that influence the consumer behavior in an economy when the price of the commodities increases.
Hence, by looking at these factors the research will be able to measure and determine factors influencing price elasticity among consumers. In addition, through the analysis the research will be able to determine both positive and negative price elasticity responses that affect the status of the aggregate economy either positively or negatively. (Assael 67)
Thus, the analysis of the research results will be arguable. In other words, the outcome of research of another person is likely to contradict this research; this is because price elasticity which is based on the consumer behavior influences the consumer behavior of a consumer in a different way as another consumer. Thus, the analysis will take a descriptive argument that favors both sides of consumer behavior. (Arnold 89).
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Assael, Henry. Consumer Behavior: A Strategic Approach. Pennsylvania: Houghton Mifflin, 2004. Print.
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Baumol, William & Alan S. Blinder. Economics: Principles and Policy. Michigan: Cengage Learning, 2011. Print.
Blanchard, Olivier. Macroeconomics. Carlifonia: Pearson Hall, 2008. Print.
Jorgenson, Dale Weldeau. Welfare: Aggregate Consumer Behavior. New York: MIT Press, 1997. Print.
Krugman, Paul and Robin Wells. Macroeconomics. New York: Worth Publishers, 2009. Print.
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Ramahi, Wadee. “The Impact of Oil Prices on Consumer Behavior.” Social Science Reseach Network. 2011.
Sorhone, L. Price Elasticity Demand. New York: VDM Verlag , 2010. Print.
Szmigin, Isabelle. Understanding the consumer. New York: SAGE, 2003. Print.