How do Psychological and Economic Factors Influence Consumption and Affect Saving Habits?

Keynes's psychological law of consumption states that "the income increase into the economy definitely increases consumption, which is why consumption is a function of income, but the law also says that as income increases, consumption increases, but at a slower rate than income", It means our consumption is influenced by our income, but do you know that other things also influence our consumption?

As we know,  For driving economic growth,consumption is a fundamental aspect of human life. Consumption refers to the use or expenditure of goods and services by households, individuals, and organizations to satisfy their economic, social, and psychological needs and wants. But have you ever wondered why we consume the things we do? Consumption is based on need or is influenced by other factors like psychology, marketing, policy, etc.? Can consumption affect saving habits?

Let's explore the answers to such questions.

The most important factor behind consumption is psychological factors . Consumer's psychology prominently influences their consumption. Psychological factors such as addiction, habit, social norms, peer pressure, mood, emotions, social environment and self-esteem etc. For incidence, diamonds are not essential for life but to enhance self-image or to maintain social identity or status, consumers may purchase the product.  When we see a shopping mall, we do some shopping  it means our physical and social surroundings influence consumption. Social media is influencing our consumption patterns nowadays. Also positive or negative feelings towards the product or service. Framing effects means presentation of economic information (e.g., prices, discounts) can influence consumer perceptions. The economic aspect is a key factor in consumption. Limitation of resources or products can increase desire and perceived value. The price of a product affects the consumption of consumers; price changes affect consumer behavior, including substitution and demand elasticity; switching to an alternative due to a price change. Tactics is market strategy which significantly influences consumption is, Advertising- shapes perceptions, attitudes, and beliefs about products. Branding- creates emotional connections and loyalty. Visual marketing- uses images and videos to evoke emotions and attention. Customer reviews- leveraging social proof and credibility. Free Trial: offering a free trial or sample.

Companies are leveraging this psychology to increase consumption, using various tactics to encourage consumption such as scarcity tactics: create a sense of urgency by offering limited-time offers, exclusive deals, and countdown timers. Creates artificial needs and desires. Companies giving convenience to consumers by offering easy payment options, subscription services, and one-click purchases lead to an increase in consumption. An increase in consumption is significantly affecting saving habits. Reduction in savings rates, less money being saved due to impulse purchases and overspending. Unnecessary consumption focuses on immediate gratification and neglects the  long-term savings goals. Inadequate savings lead to reduced retirement funds and financial insecurity. Overspending and debt leads to financial stress, making it harder to save.

Combination of psychological and economic factors, consumption behavior is influenced  and  unnecessary consumption which affects saving habits. Prioritizing expenditure and avoiding unnecessary consumption leads to an increase in savings habits. Individuals, businesses, and society as a whole can make informed decisions by knowing the psychological and economic tactics behind consumption.

-Shruti Shinde