Consumers in the Market Economy Flashcards
What is consumer sovereignty?
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
How does consumer sovereignty work and what are its effects? (x3)
- 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
Describe the impacts of marketing (x3)
- 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
What are the effects of misleading or deceptive conduct?
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
What is planned obsolescence?
When goods are designed to wear out quickly or go out of date in order to encourage consumers to make purchases in the future
How does anti-competitive behaviour limit consumer sovereignty?
Firms that operate in markets where there are few other sellers can also diminish the ability of consumers to choose what they really want
Factors that diminish consumer sovereignty (x4)
- Market
- Misleading or deceptive conduct
- Planned obsolescence
- Anti competitive behaviour
Choices to spend or save + equation
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
What is average propensity to consume (APC) + equation?
The proportion of total income that is spent on consumption
APC = C/Y
C = Consumption expenditure Y = Disposable income
(APC + APS = 1)
What is average propensity to save (APS) + equation?
The proportion of total income that is spent on consumption
APS = S/Y
S = Savings Y = Disposable income
(APC + APS = 1)
Factors that influence the decision whether to spend or save (x7)
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
How does a rising income affect savings?
As income rises, people tend to save a higher proportion of their income, i.e. APS rises and and APC falls
What is the consumption function?
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
Marginal propensity to consume (MPC) + equation
The proportion of each extra dollar of earned income that is spent on consumption
MPC = change in consumption/change in income
(MPC + MPS = 1)
Marginal propensity to save (MPS) + equation
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)
Explain savings at different ages (School, Work, Retirement):
- 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
Factors influencing individual consumer choice (x5)
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
What is a substitute good?
A good that consumers may choose to buy in place of another good e.g. butter and margarine
What is a complementary good?
A good that is used in conjunction with another good e.g. petrol and cars
Returns to factors of production (x4)
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
