The model of purchases, The precautionary motive, The role of...

Purchase model

Modern researchers B. McCallum (1987) and K. Daoud (1990) suggested that the individual's decisions about money should not be considered in isolation, as suggested in previous concepts, but on the basis of a general model of human well-being.

Using money when shopping leads to significant time savings for the individual. The optimal behavior of a person means that he makes a choice between working time and free time on the basis of maximizing the individual utility function:

where With - the volume of consumer goods and services available to the individual on the income they receive; R - free time; L is the running time.

The more a person works, the higher his income - but the lower his ability to use this income, as his free time is reduced in proportion to the growth of the work time.

However, the consumption of the individual C is a function of the prices of goods and services (P) and time , spent on making purchases ( t ):

And - the more time it takes to make purchases, the smaller the volume a buyer can purchase. Fatigue of a person from shopping and limited time in general (including purchases) reduce the effectiveness of acquisitions.

What role does money play here?

When a person has a lot of money (in any case, they are enough to pay for all desired products), the time for shopping is reduced, the individual does not need to make several trips to the store, if he can get what he needs at a time. When money is not enough, one time may not be enough, the individual will have to make several trips to the store, possibly spaced in time.

Thus . Therefore, - the more money an individual has, the higher the volume of his consumption, and the higher his welfare. Money turns out to be an important element of the individual utility function U = U (M ), but not because they have value in themselves, but solely due to the fact that they shorten the time of purchase .

The precautionary motive

Getting income and the need to buy a product or pay for a service does not always coincide in time. Expenses may exceed one-time income, or unforeseen expenses arise. For all such cases, special money is required - money postponed from precaution.

The role of the volume of transactions

Demand for money on the precautionary motive is connected with transactional demand. The more transactions a person commits, the higher the risk of not getting the right amount at the time of a favorable price change or the appearance of a new opportunity for a transaction. Therefore, the individual will be willing to set aside for the precautionary funds the amount of money in proportion to the amount of money needed for transactions:

where .

Or in another way:

The coefficient of proportionality (the share of the precautionary motive in the transaction demand for money) does not remain unchanged. Its magnitude will vary depending on the state of affairs in the economy. The better the economic situation - it is easy to find the desired job, the incomes grow, many new goods and services appear - the more the consumer feels more secure, the smaller share of nominal income he will leave as a precaution. If a recession begins in the economy, and many people lose their jobs or are forced to accept lower wages, firms are closed, goods are not sold, pessimistic expectations will prevail, future plans will increase, and everyone will decide to leave an increasing share for precautions.

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