How is purchasing power defined?

Purchasing power is defined as the ability to purchase goods and services. This concept is fundamental in economics, as it reflects how much a consumer can acquire with their income, considering the prices of those goods and services. When individuals have a high purchasing power, they can afford more items or services, while a decrease in purchasing power typically means that prices increase relative to income, limiting what one can purchase. This concept is crucial for understanding economic health, consumer behavior, and market dynamics.

The other choices pertain to aspects related to economics but do not directly define purchasing power. While total income is certainly a factor in determining purchasing power, it does not encompass the full definition, as income alone does not indicate how much can actually be bought when considering price levels. The rate of inflation indicates how prices increase over time, which can affect purchasing power but is not a direct definition of it. Lastly, the average cost of living provides context on how expensive it is to maintain a certain standard of living in a particular area, yet it does not define the ability to purchase goods and services.