If the economy is defined as the institution which facilitates the production, exchange and consumption of goods, then the micro-level economy is that pertaining to individual goods and the factors and behaviours affecting individual products. When these micro level economies come together, they combine to create the (macro) economy. Part of the structure of micro economy is the behaviour of households as one of the economic agents. Alongside firms (producers), their decisions and actions are among the most significant features of the circular flow of income model. Central to the model is the consumption by those households of goods and services, and the supply of labour to firms in order for them to function and produce outputs. Households also receive income from a variety of sources, utilising their income in a number of ways as shown later. Consumer expenditure also takes place to complete the flow such as day to day living expenses, savings (for example in the form of asset purchase or pension contributions) and finally in the form of taxes.
The influences upon household decisions, in particular their expenditure (therefore leading to demand) can be described through a variety of factors:
Wheelock provides an indication of income factors which influence expenditure by demonstrating that even the country of residence can determine how proportions of income for households are directed to various expenditure. His logical summary is that poorer nations will spend a greater proportion of income on basic life requirements such as food (2000 page 63). There is a similar variation in proportion of expenditure within nations, where income is unequally distributed between households. The outcome is similar in that households with higher incomes spend more on both luxury and basic commodities. If the level of national income increases then households will exercise the additional spending power though purchase of more or different goods. This can mean that in some cases, goods considered as inferior', may decline in levels of demand. A good example is black & white televisions. Rising income and cheaper production of colour TV's means that the level of black & white sets produced has dropped to almost zero.
Where a market system operates, then households are likely to have a choice in what they pay for goods. If prices of goods change, then households will exercise that choice and make decisions which then alter the demand for those goods. Wheelock (pg 69) describes the relationship between price and demand using the basic law of demand; as prices of goods fall, demand increases. As price decreases, then demand rises. The relationship is graphically represented by the demand curse which maps the points where demand and price meet between each axis. This assumes no other factors affect the household purchase decision, but does indicate how much of a good can be sold for each level of price. If factors affect price making it change, then the curve will indicate the demand.
Where factors affect quantities demanded, instead of movements along the demand curve, the curve instead moves completely referred to as a shift in demand'. In the example of colour TV sets above, cheaper production and greater income has led to lower prices making the sets more available to households. The original assumption about the relationship between price and demand no longer exists and so the curve is redrawn to reflect the change in factors. The sensitivity of demand of goods to changes in price leads to the concept of price elasticity (pg 73). If prices rise but the demand does not radically change, the good is determined as inelastic. An example here is salt. Households require salt and so a price increase may not lead to massive reduction in demand. Similarly, where a minor price change takes place and...