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Recession and Cosmetics Demand - Research Paper Example

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This paper analysis the demand of cosmetic in a recession based on the demand theory, inferior goods theory, the substitution effect and the income theory, a recession refers to a period whereby the economy experiences a decline in output. In a recession employment declines and this means that per capita income declines, as a result the demand for goods and services in the economy declines as income declines…
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Recession and Cosmetics Demand
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Download file to see previous pages Therefore a decline in their real income makes goods and services relatively expensive.
In economics demand is influenced by a number of factors and this include price, price of substitutes and income. For a normal good as the price of this good increases then the demand for this product declines, assuming that all the goods in an economy are normal goods and that cosmetics are substitutes to highly luxurious goods then it is evident that a decline in the income of consumers will result into a relative increase in the price of the luxurious goods which will be substituted with less expensive cosmetics. This is referred to as the substitution effect, the following diagram shows the effect of an increase in price on the demand.
Consumers want to maximize their utility, in order to maximize utility consumers want to increase the total units of goods consumed, however the total units of goods and services purchased is determined by the budget line and the indifference curve, for this reason therefore the decline in income results into a decline in the real income and therefore consumers will only purchase a few units of goods, in order to maximize utility the consumer will opt to purchase...
The article states that the employment level and investment in the cosmetics industry increases in a recession, this can be explained by the multiplier effect, as the level of demand increases as discussed above investors anticipate higher demand and as a result they invest more, more investment mean that the level of employment in this industry will increase. Therefore investment is influenced by the high demand in this industry.
This scenario can also be explained by the inferior good concept, the demand for inferior goods decline as the income of consumers increases, at a certain level of income consumers no longer demand the inferior goods and therefore it is true to state that as the income level declines the inferior good demand increases, the following diagram shows the changes in the demand curve as income increase for an inferior good:
From the above diagram it is evident that as the level of income increases the demand increases however at a certain level of income an increase in income will result inot a decline in demand. For this reason therefore cosmetics especially lipstick can be considered as an inferior good whereby during economic hardships and the level of income is declining the demand for this good increases, it is also true that when income increases the demand for this good declines.
Conclusion:
From the above discussion it is evident that the article states that the cosmetic industry does not change as expected, in the first case we associate cosmetics with the theory of inferior goods whose demand declines as income increases and therefore demand may increase as the level of income declines in a recession. Consumers also experience an increase in relative prices as their real income declines, this means that as consumer ...Download file to see next pagesRead More
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