Purchasing power assesses the quantity of various goods and multiple services that a household may have, given its income. Rising prices below disposable income lead to an increase in purchasing power. In the long term, it is possible to observe considerable improvements du household purchasing power if incomes are increased, but these may also turn out to be particularly low in certain cases. What exactly do we mean by household purchasing power? That's what we're going to see together today!
What is household purchasing power?
The economic concept of purchasing power must be considered as a whole made up of several elements, namely:
- Of his household;
- of its consumption;
- of his income.
For this reason, INSEE specifies that "purchasing power is therefore the quantity of goods and services that the income gives the possibility of buying”. Purchasing power is then calculated on the basis of primary income, including mixed income, plus capital gains, minus any mandatory deductions.
As a result, it is quite possible to assess purchasing power from the income that is available in a household, in particular its proportion consumed. In other words, it is the part of income which is available and which is allocated to consumption rather than saving. In order to know its quantitative evolution, it must be analyzed over a given period of time.
The results of evolution
In view of the results, it is appropriate to question the various existing variables, we are talking here about the evolution of household income as well as the evolution of prices. To provide an in-depth analysis of the evolution of purchasing power, INSEE introduced the consumption unit method. It should be noted that this is a weighting system which assigns a coefficient to each member of a household, thus making it possible to compare the standards of living of different household structures, depending on income.
What is the link between price decision and purchasing power?
It should be noted that an increase in prices below an increase in income is an element which is favorable to consumers, because it entails some increase of their purchasing power.
On the contrary, when prices increase faster than the rate of income, purchasing power in this case decreases. Thus, to estimate the impact on purchasing power and to be able to determine its variability, it is necessary to understand price formation of the market.
Price is the result of the correspondence between demand (i.e. the quantity of a product that a buyer is ready to buy) and supply (i.e. the quantity of a product that a seller is ready to put on the market at a price presented). When the price of a product drops, consumers are more likely to want to buy it.
What about the phenomenon of supply and demand?
This phenomenon corresponds to the theory of supply and demand, in which buyers and sellers react in opposite ways when prices fluctuate in the market. This is usually real, but in a few cases this mechanism does not apply. Indeed, raising or lowering the price of a particular product does not necessarily lead to a change in purchasing power.
Up and down movements do not affect the market. Knowing that demand can increase accordingly (especially in the event of a shortage), it is in most cases quite easy toincrease the price of products, without disturbing the behavior of consumers vis-à-vis these same products.
In this case, unlike raw materials, ordinary materials have a high price elasticity. The response to the request is inversely proportional to the price change, in other words :
- as prices rise, the demand for goods falls;
- in the event that the price would fall, the demand for the goods would increase.
However, if income does not increase commensurately, households must make decisions to limit the consumption of other goods. As a result, the extra money that is usually spent on “fun” goods results in negative numbers.
