Under economic stress rational behavior may yield increased consumption of pricier goods

Lennart Quante, Christian Otto, Sven Norman Willner, Robin Middelanis and Anders Levermann
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Sven Norman Willner: Potsdam Institute for Climate Impact Research (PIK)

No n2tqh, OSF Preprints from Center for Open Science

Abstract: The behavior of consumers is one of the elementary market forces. Thus, changes in consumed quantity in response to changing prices are an important determinant of economic behavior. Here, we show analytically under minimal assumptions that in an out-of-equilibrium market it can be rational to buy more of a good in spite of increasing prices. When rational consumers maximize their utility, consumption is driven by two factors, the relative price change of goods and their substitutability. Influenced by heterogeneous prices between suppliers and goods, the budget-driven preference for goods with the least price increase is competing with the utility-driven substitution of goods. This leads to a stabilizing feedback loop emerging from any utility function that is strictly monotonically increasing. We illustrate this feedback dynamics in an agent-based model with utility-optimizing consumers under regionally heterogeneous weather-induced supply failures. The resulting relation between changes in prices and quantities are predominantly in line with macro economic observations, but a positive correlation between price and quantity emerges in out-of-equilibrium situations. Thus, in a stressed economy rational consumers might buy more of pricier goods in spite of budget constraints.

Date: 2023-07-10
New Economics Papers: this item is included in nep-hme and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:osf:osfxxx:n2tqh

DOI: 10.31219/osf.io/n2tqh

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