Purchasing power
Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 9, Ch 9 "The Price Puzzle: What Drives the Market"; Class 11, Ch 2 "Indian Economy 1950-1990"
Meaning
Purchasing power is the ability to pay for goods and services. Demand is a desire backed by purchasing power. A need that has no money behind it is not market demand. This is why markets can leave basic needs unmet. In the macro sense, purchasing power also means the value of money: what one unit of currency can buy at a particular time.
Example
Many very poor families need low-cost housing. They cannot pay for it, so builders do not see it as demand and may not supply it. When a price falls, a household's purchasing power rises even though its income has not changed.
Don't confuse with
- Consumer income: income is the money a household earns. Purchasing power is what that income can buy at current prices.
- Want or need: a need is necessary for survival and a want is a desire. Neither becomes demand unless the buyer has purchasing power.
Related concepts
- Determinants of demand
- Related goods
- Substitute goods
- Complementary goods
- Consumer income
- Future price expectations
- Population size and composition
- Shift in demand curve
- Movement along the demand curve