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Definition: Discretionary Buying Power
Discretionary buying power is related to an entity’s discretionary income. Discretionary income is that part of an entity’s income that is available for saving, investing or spending, after all the necessary expenses like those for food, clothing, shelter, utilities and prior commitment expenses like for loans, school fees have been done. It is that income which is left after the taxes have been deducted. An individual may save, invest or spend the income according to his/her discretion. Discretionary buying power is this after tax disposable income.
The economy of a company is highly dependent on this discretionary buying power and so is the buying power dependent on the discretionary income. It is said that about 70% of the US economy is driven by the buyer’s discretionary power. As the discretionary income increases, people spend more. Retailers get more money. Thus, wholesalers and suppliers get more money. More jobs are added. Thus, the individual worker gets more money. This individual worker is now a new consumer, who spends on retail goods. And the cycle goes on.
During times of inflation, consumers buying power is restricted. Thus, they spend less. The retailers get less money. So do the wholesalers and suppliers. This leads to decrease in the no. of jobs. Thus, the average individual is left with no or less money to spend. And thus, the inflation increase further. During inflation, an individuals’ net income might increase. But the discretionary buying power of this individual increases only when, the rate of inflation is less than the rate of increase in income of the individual.
Marketers that sell non-essential items or services like luxury goods, vacation packages, artwork, and jewellery benefit a lot from high discretionary buying power. They try their best to attract these type of consumers. All marketers compete amongst themselves for the consumer’s purchases i.e. they compete for the limited amount of discretionary buying power. For example, competition means that an individual may choose to watch a movie, buy some jewellery or go on a vacation by using his/her discretionary income.
Thus, discretionary income is an important factor that affects a country’s economy. So, it is advisable to the individuals to ‘Think before you spend’.
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