Analysis of Consumption Patterns of Different Socioeconomic Groups

The research reported in this thesis was on “Analysis of Consumption Patterns of Different Socio Economic Groups”. The purpose of research was to study the socio-economic impact of consumption of the households and how they spend their income. The secondary data was collected by consultation of literature in the libraries and Internet and also from the material printed by different academic journals. The primary data was gathered by floating questionnaires and conducting several different interviews. Stat graphic software was applied to analyze data for multiple regression analysis and the results were interpreted by usual principles of statistics. The findings suggested that the consumption was a very crucial function of income but there were other factors apart from income that affected the level of consumption of household and their preferences. This would have an effect on the economic level as well, hence marketers should know and understand the needs of the household to target there product and services to households for betterment of the society as well as profitability of the firm.

INTRODUCTION

Overview of the topic under consideration

Consumption is a topic on which a lot of research has been carried out by the economists and psychologists to know what leads to different levels of satisfaction from consumption what factors lead to variation in consumption patterns of households with same income levels. This research paper intends to find out important factors that influence the consumption levels of various households, whether the individual preference has impacts or not while making consumption decisions on a household level. What boundaries restrict the consumption levels?

The consumption pattern in Pakistan has improved over the years for various reasons such as increase in incomes and more availability of different kinds of goods and services but there always have been class conflicts present hence leading to disparities among rich and the poor classes. So the growth in consumption has been in different amounts among the different socio economics groups this leads to an immense increase in the social stratification.

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Apart from factors such as size of the family, occupation, structure of the family, standard of living and location one of the factors that has direct relation with the consumption is population. If the population increases the consumption level changes drastically. Similarly if the population consists of elderly or has baby boomers the pattern of consumption is affected greatly by the type of goods and services produced in the economy is affected moreover consumption patterns influence the dispersion of income and at times leads to motivation for earning a higher wage and this thesis would provide us with the deeper understanding of consumers and their household consumption pattern and their motivation behind earning and spending in a particular manner.

Background of the topic

Consumption function in economics is the relationship between consumer spending and the various factors that are determining it the consumption function comes into formation due to accumulated spending of all the households in the economy hence at the Economic level the uniqueness of consumption functions are imperative for many questions in both macroeconomics and microeconomics. At the smaller level that is the household or family level, these factors may comprise of income, wealth, expectations about the level and riskiness of future income or wealth, interest rates, age, education, and family size. Individual level the consumption function is also inclined by the consumer’s preferences that are behavioral in nature such as patience, or the willingness to delay gratification, by the consumer’s approach towards risk, and by whether the consumer wishes to leave a inheritance to their family members.

Theories and hypothesis were developed by Keynes on consumption patterns these were evolved from the early studies that supported the fact the short run marginal propensity to consume was much more stable when compared with average propensity to consume. Economists further more refined the original work of Keynes and came up with theories of permanent income hypothesis, theory of life cycle hypothesis and demonstration effect hence they were able to establish the fact that consumption was extremely responsive to income changes on which Duesenberry tried to refute it with demonstration effect hypothesis. These theories still could be found in various economic text books

Economists developed Engel curves these curve showed consumption levels and patterns graphically they even derived budget constraints curves with the help of indifference curves providing a lot of evidence as how and what effects the consumption that in turn shows the status and the lifestyles of an individual household in the economy.

Importance of the study with respect to the world

Consumption level helps in identifying the level of demand of goods and services in the economy and the type of goods and services that are demanded in a particular economy and indicate what sort lifestyle a particular society is enjoining example Americans are famous for not saving and they consume a lot of consumer non durable items when compared with rest of the world .Hence saving hampers consumption and can greatly affect overall demand in the economy if there is a lot of saving in the economy marginal propensity to consume goes down showing that saving and consumption has a negative relationship.

This could lead to greater problems at a macroeconomic level such as reduction in aggregate demand and unemployment of resources in the economy here government also needs to intervene and to improve the economy this would be achieved by increasing demand by increasing the government spending.

These days consumption patterns are highly influenced by multinational or transnational companies this phenomena is known as mass consumption or consumerism. Consumption of goods produced by MNC’S or TNC’s has lead to the adoption of different cultures and consumption patterns in a local household a common example of this would of Mc Donald’s today you might be in any part of the world but you would always find a branch of Mc Donald’s due to globalization in the economy would lead to greater choices that an individual would face while making consumption decisions hence changing consumption patterns of a very traditional economy like Pakistan. Other factor that could potentially change the consumption pattern would be technology as traditional goods and services would become redundant and no longer will be demanded hence this would lead to fluctuation in consumption levels as well as the patterns of consumption.

There is high inequality in consumption patterns among different countries due to differentiation in social classes differentiation and difference in per capita income, population and various other factors there are market biases on the bases of luxury or mass consumption of goods.

Importance of study with respect to Pakistan

Since Pakistan is a developing country it has a lot of different classes and a lot of population mostly consisting of children and teenagers with such a diverse society there is a lot of difference in consumption level and patterns they are influenced by income, religion, locality in which a particular household resides and the occupation of the head of the household is since Pakistan has a strong culture of saving and transferring bequest to future generation hence how does a particular household decides what to consume and how to consume?

We consume a lot differently when compared with the western society as they focus on more luxury items and consumer durable goods on the other in our society households focuses on basic necessities of life. More over there is a lack of studies that have been carried out on the consumption pattern of socio economic groups that are prevalent in Lahore.

Reference groups play an important role in determining the consumption patterns of various households and demonstration effect has the strongest effect on the consumption of the households in Lahore among the various different classes. This research paper would help to unravel the preference of the households and the types of goods that they consume and how do they decide and come to common grounds while they consume as in single unit of family since we have a very strong culture of living together in extended families.

As many generations are living and consuming together the basket of goods and services that they consume would be highly differentiated. But these days trends are changing and people are moving towards nucleus family system and Pakistan is enjoying a lot of female participation in work force hence will this new trend affect the way a family consumes as a household? Secondly Lahories as consumer have a lot of choice and since at this day and age a lot trend is shifting toward mass customization this research paper would allow to analysis such trends in Lahore.

Research question

Consumption patterns of different socio-economic groups take into consideration the three main social classes the elite class, the middle income group and the lower income group that resides in three different localities of Lahore namely interior Lahore or the old Lahore, Allama Iqbal Town and Defence housing authority. Households with different casts and religion would be targeted to cover the maximum number of the different socio economic group. There is a lot of diversity in terms of socio economic groups in Lahore hence their consumption patterns also varies drastically they have income that ranges from 3000 rupees monthly to more than 80,000 rupees.

A developing country like Pakistan faces a lot of discrimination in terms of income disparities, low income per capita income and a growing population that effect consumption as a whole. The research question for my thesis is a combination of macroeconomics and consumer behavior. It would provide us with the deeper understanding of consumers and their household consumption patterns. This would further allow producers to target and position their products in such a way that they become an integral of household consumption and as a result the economy can flourish.

LITERATURE REVIEW

Ying (2003) conducted a research explaining the fact how children influenced the spending patterns of family and in about 27.8% of families, children’s consumption uses one third of the family’s total income. In 35.6% of families, children’s consumption uses 40% of the family’s total income. In 19.4% of families, children’s consumption takes one half of the family’s income. And in 7.4% of families, children’s consumption takes over one half of the family’s income. Thus in most families, the child’s consumption level is higher than the average per capita consumption of the family. He highlighted various factors such as higher education levels for children including extra amounts paid for private education and tutors moreover more recreational activities and high end gadgets like mobiles phone, laptops and increased expense towards health care of the children.

Krueger and Perri (2005) found out in a research paper that increase in income inequality in U.S.A was prevailing but there was no inequality consumption. This was because of different trends within-group inequality which was faced an increase in income and a little less increase consumption. They developed a simple framework to identify analytically that how income inequality could result in consumption inequality with respect to standard incomplete market model thus they wanted to document this consumption inequality facts from the U.S data. They have used data from the Consumer Expenditure (CE) Survey for the years 1980-2003.

Cutler (2005) tries to identify implied marginal propensity to consume out of a given income level in Hong Kong for doing this he develops a proxy measure for labor income then tries to estimate consumption function with respect to life cycle model. The author develops a reliable relation between proxy measure of labor income and long run propensity to consume the estimate calculated comes out to be 0.87 for Hong Kong depicting the fact the marginal propensity to consume is in line with other industrial countries of the world.

Carroll, Fuhrer and Wilcox (1994) conducted a research paper which talks about habit formation that is the consumption done when a household is not enjoying same level of income as it did previously but the consumption patterns of the household remains the same. Secondly they tried to analyze the impact of consumer sentiments on the consumption patterns taking into considerations the various economic variables into account. They ruled out permanent income and pure life cycle hypothesis and stated consumer spending is an unclear measure of uncertainty when uncertainty increases the level of consumption falls hence leading to precautionary savings.

Chow, Fung and Ngo (2001) did a research about the Chinese economy and Chinese entrepreneurs who have grown along with the Chinese economy this consumer group is the most influential in consuming expensive goods and services. This research paper compares and contrasts the consumption habits of low income business with that of entrepreneurs coming to conclusion that small businesses incomes are transitory and more volatile hence their consumption is less and they tend to save more on the other hand entrepreneurs earn more and spend more lavishly on meals, traveling, private education and luxury items. Geographic locations and socio-demographics of household have significant effects on the tastes and preferences. Similarly socializing activities that are carried out by the entrepreneurs are the second largest expense in their budgets as they need a lot of networking to carry out the business. But on the other hand low income groups tend to spend a large proportion of expenditure on activities such as medical care, socializing and education of their children. The authors have run a regression model using various factors such socio demographics and other factors to find out strongest affecting variable.

Aydin (2006) talks about the consumption patterns in turkey’s different socio economic classes and finds out that globalization has led to transformation, reconfiguration and reformulations of class structure and this is leading to social shifts from class based politics to identity politics, ideology to lifestyles and mass production to consumption these forces have fuelled the social change hence leading to emergences of new middle class living a new leisure lifestyle. The research reapproved the fact that social class variables had a significant on consumption income had the strongest positive effect of all at the consumption level simultaneously income did not alter the influence of class difference. Education had effected the class differentiation the group with higher education had better living standards thus making education important mediating factor. The analysis in this research paper depicted the class structuration results due to interaction income, education levels, and residential location.

Phipps and Burton (1998) did a research where they assume that the household consumer behavior is equal to household utility function and this function is maximized with respect to single budget constrain and incomes from both the partners are pooled. But both the partners have different utility functions; the households comprising of teenagers with incomes add more complication to analysis hence they preferred to avoid it. They found household income, education levels of husband and wife, region, level of urbanization, age and number of children is of great importance to household utility curve. Income earned by the wife is more likely to be used for restaurant food, her clothes and kid’s clothes. Whereas husband’s income is allocated towards transportation, they considered clothing as personal private good and it increased with the levels of income of each individual.

Thomas (1993) this paper tries to find out whether all household members share same preferences or they are dictated by any one member of the household. Data taken into consideration is from a survey carried out by Instituto Brasilleri De Geografia they came to a conclusion that when income is in hands of females shares of expenditure increases towards housing, education, health, household services and recreation when males are given the budget they tend to spend excess on health, household service and recreation. Education is considered intervening variable for earning hence increase in consumption, so they exclude education from demand function and include it as a valid instrument for total income. The researchers have come to these conclusions by conducting linear and quadratic models on the complied data.

Bonney (1988) previously sociological analyst of British class structure consider males as the only major determinant of the social class position of the household along with time the trends have changed today there is greater involvement of married females in paid work. This phenomenon is making wives extremely important in family budgets and the socio class location of the household, a husband’s increase in wage would negatively affect female’s participation in paid work but on the other hand the increase in wives earning would have smaller but negative effect on their counterparts income. This increases their say in consumption as they are now more economically active.

Sommer (2003) discuses that under habit formation it is difficult for the households to adjust to their new income levels this happens gradually if a tax cut is implemented they respond to such policy slowly. But some consumers save a specific amount of income as a precautionary measure to maintain a similar standard of living.

Megir (2004) talks about the theory of consumption function that played a vital role in explaining Keynesian demand management. Transitory tax policy or transitory income could have insignificant effect on real consumption though income is more volatile than consumption but the long run marginal propensity to consume out of the income is higher than the short run.

D’orlando(2010) carried out a research to investigate the importance of behavioral principals in micro-foundation of Keynes consumption theory. It was concluded that behavioral instead of maximizing principals can be rightfully considered as possible for micro foundation for Keynes’s work. He said there are chances of cross fertilization of Keynesian approach and behavioral sciences in reference to theory consumption function. This research showed that utility maximization is not the major focus Keynes representation of individual’s behavior and many subjective factors are included in the consumption theory lastly the traditional aggregate consumption function is immensely based on maximizing agents.

Khan and Dhar (2004) carried out a research on behavioral decision theoretic perspective on hedonic and utilitarian choices and they found out that difference between purchase and consumption of goods and service found out that there is a very thin line which consumer does not even realize and decision making of consumption is merely affected by income, preference and lifestyle of the consumer.

Tai and Tam (1997) discussed the lifestyle of females that was changing due to the different socio economic factors such as delayed marriage, smaller family size and single parents have lead to changing dynamics of consumer market as a result the consumer preference are changing and consumption pattern of the families.

All these research papers have added a new dimensions to the topic under consideration emphasis on the fact consumption is a vital function of income but there are many other factors that influence the consumption pattern there are incidence when two households with sane income level may have different consumption pattern due to lifestyle, preference and the stage of lifecycle they are in as a household greatly affects the consumption patterns. All these researches try to explore the behavior patterns that are crucial for molding the consumption pattern all these researches have added different key reasons and not a single research as been able to come up with any common behavior traits in the different societies of the world this phenomena indicate that the consumption patterns changing according to society the house hold resides in.

METHODOLOGY

Research type

The research undertaken would be quantitative research a lot of facts and figures would be included they would help to support the arguments that will be established after critically analyzing the results obtained by this research

Data type and research period

The research would be primary and secondary as a lot of previous research papers have been consulted for reference and further data would be collected regarding the Pakistani economy and how does an average Pakistan person consumes this research would be carried out in 2011 the data under consideration is cross sectional since it’s both secondary and primary .

Sources of data

The data would be collected through tailor made questionnaire that would help us to support our arguments and allow us come to a sound conclusion and recommendation at the end of the thesis. Secondly interviews the different retailers of the locality would be conducted to reduce the biases in the questionnaire as people hesitate to provide fair information. Thirdly I would take into consideration my own observation that would facilitate better understanding of the topic as well as its evaluation.

The questionnaire was floated in among three various locations where many different socioeconomics groups were prevalent According to the questionnaire analysis the percentage of male and female is in the ratio of 42% and 58% respectively. Almost twenty different casts were targeted they showed that on average a household spends 50% of their income on food and 20% of income is spend on clothing and 10% of income is spend on housing, schooling and about 20 different casts were targeted through the questionnaires that floated among the three different localities respectively (see appendix A)

The left over income is utilized by directed it towards saving and entertainment expenditure the ratio of income directed towards savings and entertainment expenditure is about 20% see appendix. In the various interviews that I have conducted, I found out that there is significant difference in the way the different socio economic groups spend their income and their consumption varies accordingly see appendix. The population of Pakistan is mostly humongous with a very s small numbers of minorities that are prevalent in Lahore basically the population trends majorly consists young population.

Theoretical framework and variables under consideration

Operational definitions

Standard of living: It would include income spent on consumer durables, non- durables, health, recreation and entertainment, social services and luxuries goods by the households, larger the amount of the income spent on these goods would indicate that the household enjoys a higher level of standard of living and would be consuming a larger proportion of disposable income.

Size of the family: The number of the people living together under one roof and consuming the pooled income i.e. An identical source of income despite the fact whether they are related or not would be considered as a family.

Structure of the family: type of household taken into consideration would be nuclear family structure or the extended family structure apart from the two parents or the single parent households, all of these types of households are very common in Pakistan though the recent trends are shifting to nuclear family structure.

Location: This would take into consideration the area in which a particular household resides there are three localities under considerations in this research paper, each of these localities would be depicting different socio economics classes in terms of income, standard of living, occupation and sizes and structure of the families living there.

Occupation: The means from where the households generates income for consumption purposes this would even account for income generated from assets that a particular household maintains e.g. rent on assets or return on capital and things like credit cards would also be included as they tend to increase the disposable income for the household thus allowing them to attain a higher consumption level.

The life-cycle model: it states that save when people are young for their old age they do this to dis-save in their old age as they have no other income sources to support their consumption. Hence this would lead to fluctuations in consumption patterns. They can finance their old age either by selling off the assets that they have accumulated in their young or by saving income.

Discussion

Economic model of the income spent on consumption was developed by John Maynard Keynes he mastered this area of economics by developing various theories such as absolute income hypothesis, which supports and states that consumption is solely a function of disposable income earned in that period of time in that. Difference between predictions of Keynes’s and other economists leads to various empirical data sets, in the long run, this led to a number of other theories related to consumption that emerged after Keynes work-most prominently, these were based on relative income (Duesenberry), permanent income ( Milton Friedman ), and life-cycle income (Modigliani and Brumberg).

Keynes stated that a change in income will result in a relatively smaller change in consumption; the marginal propensity to consume will be less than one. Keynes also argued that the marginal propensity to consume will be less than the average propensity consumed, which in return stated that consumption declines as a percentage of income as income rises or we can say antagonistically as income increases the consumption decreases. Short-run studies broadly depict the consumption function of this sort, but long-run data showed that the marginal propensities and the average are roughly equivalent. The relative income hypothesis supports consumption related to other households and their past income. Firstly it implies that the proportion of income consumed by the household remains same, assuming that the position of a household remains constant in the long run on the distribution curve. This provides us with the long-run evidence. If the household is placed on the higher side, propensity to consume stays on the lower average. Secondly household is easier adjusted with the rising incomes as compared to the falling incomes this is known as “ratchet effect” which handles the consumption when there is a decline in the income this is mainly due to habit formation of consumption by the households.

The measurement of life time income is an issue of key importance to measure consumption as a function. Permanent income hypothesis states that consumption pattern is directly dependent on the total income and the total wealth which an individual expects to earn over their lifetime. The life-cycle hypothesis on the other hand assumes that individuals that consume a steady proportion of their income and that the present value of their life time income as a measure in a number of financially various areas of life where an individual earns different amount of income at various ages such as, childhood, adolescence , and old age

RESULTS AND ANALYSIS

Result generated through software stat graphic

Multiple Regression equation

y = 0.747966 + 0.152745*location + 0.11217*occupation + 0.100276*size of the family + 0.142338*standard of living + 0.267032*structure of the family

The results of the multiple linear regression model to the raw that was collected by the questionnaire, describes the relationship between y and 5 independent variables. The equation of the model that is mentioned below is showing how strong relation each independent variable has with the dependent variable y.

y = 0.747966 + 0.152745*location + 0.11217*occupation + 0.100276*size of the family + 0.142338*standard of living + 0.267032*structure of the family

In view of the fact that the P-value in the ANOVA table is less than 0.01, there is a statistically there is a strong relationship between the variables at the 99% confidence level. The R-Squared statistic shows that the model as fitted explains 99.0259% of the variability in y. The adjusted R-squared statistic, which is more appropriate for comparing models with different numbers of independent variables, is 23.2334%. The standard error of the estimate demonstrates the standard deviation of the residuals to be at the figure of 0.51929. The mean absolute error (MAE) of 0.373951 is the average value of the residuals. Hence this statistical information ensures that the statistical model that is developed is statistically strong and could be accepted as good model for the research paper.

In determining whether the model can be cut down or not, notice that the highest P-value on the independent variables is the figure of 0.2039, belonging to size of the family Since the P-value is greater or equal to 0.10, that term is not statistically significant at the 90% or higher confidence level. Consequently, I could even remove size of the family from the model as this variable has p- value greater than 0.10.

Research hypothesis

Size of the family affects the consumption pattern of socio-economic groups

H0: significant

H1: insignificant

Occupation affects the consumption pattern of socio-economic groups

H0: significant

H1: insignificant

Structure of the family affects the consumption pattern of socio-economic groups

H0: significant

H1: insignificant

Standard of living affects the consumption pattern of socio-economic groups

H0: significant

H1: insignificant

Location of households affects the consumption pattern of socio-economic groups

H0: significant

H1: insignificant

Discussion of hypothesis

Now these research hypotheses would now be discussed in detail so that we now as to what could be the possible reason of these hypotheses to be rejected. Stat graphic was used to generate the multiple regression analysis.

Size of the family affects the consumption pattern of socio-economic groups

H0: significant

H1: insignificant

Reject H0 because P value is more than 0.01%

The p-value of this particular hypothesis turned out to be 0.2039 which shows that this value is greater than 0.01 hence, Size of family hypothesis gets rejected because of the fact major respondents think and strongly believes on the fact the responsibility of every soul is on Allah hence many respondents said they don’t consider the size of their family when they spend their income and many Pakistani head of the families said that they earn for their families to provide them with comfortable life hence they don’t even bother with the size of their family this fact is one of the main reasons of Pakistanis high population . This phenomenon is highly prevalent in low income groups. But middle income and high income groups try to spend strategically.