The success or failure of a nation's economy can greatly affect consumer behavior based on a variety of economic factors. If the economy is strong, consumers have more purchasing power and money is pumped into the thriving economy. If the economy is struggling, the reverse is true. A struggling economy affects factors such as employment and interest rates, and the people may lose consumer confidence.
Supply and Demand
The law of supply and demand demonstrates the relationship between supply, demand and prices. As demand drives upward, so do the prices. This relationship attracts more suppliers, serving to not only stabilize the prices but also to keep the demand at healthy consumer levels. Supply and demand affect consumer behavior because if a product is too expensive, consumer demand for that product will decrease.
Interest rate fluctuations affect consumer spending because when rates are high, consumers are less inclined to borrow money from the banks to purchase big-ticket items such as a house or a car. Interest rates determine a consumer's purchasing power. For instance, if an individual borrowed money to purchase a home with an adjustable-rate mortgage, once that rate goes up, that individual may no longer be able to afford that house.
An increase in inflation means an increase in prices. This affects whether or not a consumer is able to afford the higher price. Inflation directly affects the value of the dollar because when inflation goes up, the dollar's value goes down, and so does the consumer's purchasing power. Inflation especially affects consumer behavior when wages do not increase to accommodate the increase in prices.
Unemployment affects consumer behavior because if a person is without a steady income, his purchasing power decreases considerably. According to Trading Economics, the unemployment rate in the United States between October 2009 and December 2009 was the highest it has been since the record high of 10.80 percent in November 1982. During this time, home sales were also down because fewer people were able to afford a home mortgage.