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Smart consumers tend to compare prices from time to time, hoping to buy more and better goods and services with the same budget - in other words, seeking out the best bargains. Census and Statistics Department (C&SD) Statistician, Mr James Cheng, today (July 24) pointed out that this consumer behaviour is very often referred to in economics as the "substitution effect".
Items in the basket of consumer goods and services adopted by the C&SD for calculating the overall changes in the basket's price level are updated regularly. When the substitution effect dominates, items with faster price increases will constitute a smaller share of the new consumption basket, whereas items with faster price decreases will account for a larger share. Hence, the overall price increase derived based on the new consumption basket will be smaller than that using the old consumption basket.
Mr Cheng, responsible for the C&SD's 2009/10 Household Expenditure Survey, said that consumers make smart choices when they have sufficient information on hand as they are in general rational, smart and very sensitive to prices as well as price changes.
For example, rapid technological advancement and keen market competition have driven down the prices of information technology and communications products, thus making smartphones, tablet computers and digital single-lens reflex cameras more and more popular nowadays.
People increasingly reading free and online news is another common phenomenon in recent years. Even though many people may be holding newspapers in their hands, the newspapers are mostly free ones. Although the retail price of traditional newspapers has remained stable over the past few years, fewer people are spending money on newspapers amid the increasing circulation of free newspapers and the booming flow of information on the Internet.
The above are some examples of substitution behaviour among consumers in the face of price changes. The advantages of sufficient market information, free flow of information and convenient transport also assist consumers in making smart choices.
Mr Cheng said, "As prices change, consumers tend to purchase more goods or services that have larger decreases in prices. They purchase fewer goods or services that have smaller decreases in prices and avoid those with increases in prices, given their fixed available budgets to meet regular living expenses.
"When consumers need to purchase a particular item, they patronise shops selling the goods with the lowest price or offering the biggest price discount, so as to buy more and better goods or services within a certain budget. What matters most is the best bargain!"
Similarly, given a fixed budget in the face of price rises, consumers tend to purchase more goods or services that have smaller increases in prices as a substitute for those with larger increases in prices, i.e. to choose the less costly alternatives in order to maintain their standard of living.
An example can be seen in how, with the growing popularity of chilled meat in the market and the more notable increases in the prices of fresh pork and beef in recent years, many housewives have reduced fresh meat purchases and have chosen to buy more chilled or frozen meat or other food like vegetables.
Mr Cheng pointed out, "No doubt the substitution effect among consumers may vary from goods to goods and from services to services. It depends on factors such as the elasticity of demand (e.g. whether the goods are necessities like food staples). Other factors include the changes and limitations in market supply. For example, if there is a decrease in the supply of live poultry, consumers would buy more chilled or frozen poultry or other types of food like vegetables."
In recent years, price hikes in basic food items have been bigger than those involved in eating out, thus narrowing the gap in the cost difference. Moreover, it is not surprising that people are dining out more often to tie in with their hectic lifestyle. Even so, consumers can still make substitute choices at various levels, such as by choosing among different restaurant types (fast food shops, cafe restaurants, Chinese restaurants, Western-style restaurants, etc), different restaurants of the same type, or even various food items on the menu.
Mr Cheng said in conclusion, "With the domination of the substitution effect in consumer behaviour, goods and services with faster price increases will account for a drop in share in the consumption basket over time while goods and services with faster price decreases will account for a rising share. Compared with the old consumption basket, the overall price increase derived based on the new consumption basket will be smaller.
"Therefore, the year-on-year rate of increase for June 2011 was 5.6 per cent according to the new 2009/10-based Composite Consumer Price Index (CPI), smaller than the 5.9 per cent year-on-year rate of increase derived from the old 2004/05-based Composite CPI."
As expenditure patterns of households change with market prices over time, the C&SD conducts the Household Expenditure Survey once every five years. With reference to the latest survey, the C&SD rebased the CPIs and updated the expenditure ranges and weighting patterns of the CPIs in April this year. For details, please visit the website: www.censtatd.gov.hk/press_release/pc_rm/2009_10_hes/index.jsp.
Ends/Sunday, July 24, 2011
Issued at HKT 11:02
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