Consumers in the Market Economy

Question 1

What is consumer sovereignty?

Answer 1

Consumers will ultimately decide what goods and services will be produced by exercising their freedom to choose what they buy. Business firms will produce whatever goods and services are in demand

Question 2

How does consumer sovereignty work and what are its effects? (x3)

Answer 2

• Consumers send signals to producers through their demand for goods and services.
• Where their demand is high relative to supply, prices will rise and vice versa
• It can determine how resources are allocated in the economy

Question 3

Describe the impacts of marketing (x3)

Answer 3

• Advertising can exert a powerful influence over the spending patterns of consumers
• Most strategies place a strong emphasis on understanding their target consumer in order to manipulate their behaviour
• Consumer sovereignty is diminished by manipulative or deceptive marketing practices

Question 4

What are the effects of misleading or deceptive conduct?

Answer 4

Consumers can be deceived by false or dishonest claims about a product, leading them to pay for items they do not want to really buy

Question 5

What is planned obsolescence?

Answer 5

When goods are designed to wear out quickly or go out of date in order to encourage consumers to make purchases in the future

Question 6

How does anti-competitive behaviour limit consumer sovereignty?

Answer 6

Firms that operate in markets where there are few other sellers can also diminish the ability of consumers to choose what they really want

Question 7

Factors that diminish consumer sovereignty (x4)

Answer 7

• Market
• Misleading or deceptive conduct
• Planned obsolescence
• Anti competitive behaviour

Question 8

Choices to spend or save + equation

Answer 8

Consumers have the choice to spend or save the remaining money when income is received and tax is paid, expressed in the equation

Y = C + S

Y = Disposable inccome
C = Consumption expenditure
S = Savings

Question 9

What is average propensity to consume (APC) + equation?

Answer 9

The proportion of total income that is spent on consumption

APC = C/Y

C = Consumption expenditure
Y = Disposable income

(APC + APS = 1)

Question 10

What is average propensity to save (APS) + equation?

Answer 10

The proportion of total income that is spent on consumption

APS = S/Y

S = Savings
Y = Disposable income

(APC + APS = 1)

Question 11

Factors that influence the decision whether to spend or save (x7)

Answer 11

Cultural factors - Some in SE Asian economies save more of their income

Personality factors - Some are more cautious and like to save more

Confidence & future expectations - if consumers are confident about the future, they are more likely to exercise caution

Specific spending plans - Individuals may save more if they are planning a major expense in the future

Tax policies - make it more attractive to save

Availability of credit - spending is likely to be higher if credit is readily available

Most importantly - level of income and age

Question 12

How does a rising income affect savings?

Answer 12

As income rises, people tend to save a higher proportion of their income, i.e. APS rises and and APC falls

Question 13

What is the consumption function?

Answer 13

A graphical representation of the relationship between income and consumption for an individual or economy. It is usually upward sloping with a gradient less than one and has a positive y-intercept

Question 14

Marginal propensity to consume (MPC) + equation

Answer 14

The proportion of each extra dollar of earned income that is spent on consumption

MPC = change in consumption/change in income

(MPC + MPS = 1)

Question 15

Marginal propensity to save (MPS) + equation

Answer 15

The proportion of each extra dollar of earned income that is not spent but saved for future consumption

MPS = Change in saving/change in income

(MPC + MPS = 1)

Question 16

Explain savings at different ages (School, Work, Retirement):

Answer 16

• When people are young, they tend to receive lower levels of income as they lack skills and education
• During middle ages, people’s incomes rise and they will consume a smaller proportion of their income
• In retirement, people no longer earn income and they consume out of past savings and wealth

Question 17

Factors influencing individual consumer choice (x5)

Answer 17

The level of income - as individuals earn higher incomes, they choose to buy more items and items of higher quality

The price of the good or service itself - Consumers must decide whether or not they are willing to pay for a particular good based on their income

The price of substitute and complement goods - the quantity of a good demanded at any time will be affected by the price of other goods

Consumer tastes and preferences - An individual will purchase goods and services which them the most utility

Advertising - may create demand for a good or service that was previously non-existent, can also make the demand for goods and services less responsive to price increases by building consumer loyalty to brands

Question 18

What is a substitute good?

Answer 18

A good that consumers may choose to buy in place of another good e.g. butter and margarine

Question 19

What is a complementary good?

Answer 19

A good that is used in conjunction with another good e.g. petrol and cars

Question 20

Returns to factors of production (x4)

Answer 20

Wages from labour - comes in the form of wage or salary payments for payments for labour when consumers participate in the labour market

Rent from land - many consumers own land that becomes a source of income when rented

Interest from capital - returns from the use of capital. People with greater wealth tend to enjoy a much higher income level with ongoing income from capital

Profit from entrepreneurial skills - if the business makes a profit, this income is a return for the use of entrepreneurial skills