Economic fluctuations are mainly due to uncertainties arising out of natural or man-made causes. Economists around the world believe that consumer demand is one of the key factors in driving the economy and any action that affects consumer demand, has a direct impact on the economy. So, it is fair to assume that consumer demand has a direct correlation with economic growth.
While if we think of a consumer, the first thing that comes to our mind is, “Who is a consumer?”. The consumer is defined as an individual who consumes any product or a service. So, the consumer is basically the end-user of the product or the service.
Every consumer has a unique basket based on their consumption pattern. So, a basket is defined as the sum of all the products or services that an individual consumes over a period. Every individual’s basket has products or services that can be categorized into three different buckets i.e. the primary essentials, the secondary essentials, and the luxury; named in order of their relative importance. This is categorized based on the marginal importance of the products & services on the existence of the individual i.e. the relative existential threat that the individual will face due to deprivation from the products & services from each category. (For further understanding on each category, please read the article “Are the essentials same for everyone?”)
Every consumer & basket makes a unique combination and the aggregate of this combination makes the demand. Consumer demand is a factor of need, want and desire and uncertainties affect one of the three factors and the category at the same time. Talking of uncertainty, it can be man-made or natural. The natural uncertainty can arise out of any natural phenomena such as good or bad monsoon, flood, pandemic, earthquake, etc. The manmade uncertainty is the result of interventions made by humans such as regulatory changes, political unrest, protests, riots, etc.
Every uncertainty brings mistrust and with mistrust, every consumer becomes more conscious. This conscious behavior affects the basket of the consumer and thereby the demand. The effect of uncertainty on the luxury products & services is adverse, as the first thing that gets hit is the desire. People try to consciously reduce their spending on this category as they are not sure about how the future will unfold and whether the income would be stable or not. The spend reduced in luxury is spent in primary and secondary essentials for building more stock, as the consumers fear availability, in case the problem persists. The reason why the economy is stable in short term even in case of uncertainty is that the total money flowing in the market is almost comparable as the spending from one category is moved to the other. But in the long run, the spent across category reduces thereby reducing the total money flowing in the market, leading to an economic downturn. If the uncertainty persists, the spending is going to be driven more and more by conscious behavior leading to even lesser and lesser money flow in the system thereby reducing the economy more and more.