Flashcards
What is Consumer Sovereignty?
Consumers decide what goods and services will be produced by choosing what to buy and what wants to satisfy - by creating demand businesses respond with supply
What adds up to equal income?
Savings + Consumption = Income
S+C=Y
In the economy as a whole, what does a change in consumption lead to?
An equal and opposite change in savings
What does a decrease in consumption lead to?
An increase in savings
What does an increase in consumption lead to?
A decrease in savings
What does an increase in income lead to?
An increase in both consumption and savings
If a persons MPS is greater than their MPC what does this mean?
They are a high-income earner
MPC+MPS=?
1
MPC=?
The change in consumption over the change in income
MPS=?
The change in saving over the change in income
List three reasons for saving
- To provide for a rainy day
- To accumulate wealth
- To leave money as a bequest
- To purchase consumer durables at a later time
- To build for speculative purposes
What impact does age have on income?
When people are young they lack skill which results in a lower income therefore MPC is reater than MPS
As people gain experience there income increases therefore their MPS is greater than their MPC
In middle age many people save for retirement
During retirement peoe no longer earn an income from their labour therefore they consume from past savings or rely on government pension benefits
How does income influence individual consumer choice?
As people earn higher incomes they tend to buy more items and items of a higher quality –> people may not be able to satisfy their wants due to low incomes –> high-income earners are more likely to buy luxury items while low-income earners will likely buy necessity goods
How does price influence individual consumer choice?
- Necessity items are cheaper and more accessible for daily use
- consumers must decide whether they are willing to pay the nominated price for a good or service
- peoples demand for luxury goods decreases as price increases
What is a substitute good?
A substitute is a good that consumers may choose to buy in place of another good e.g. margarine and butter
What is a complement good?
A complement is a good that is used in conjunction with another good e.g. shoes and socks, cars and petrol
How does the price of substitutes affect individual consumer choice?
The quantity of a good demanded at any time will be affected by the prices if other goods, e.g. if the price of margarine rises, consumer demand for butter will increase
How does the price of complements affect individual consumer demand?
The more one good is purchase will lead to an increase in the demand for the complementary good
How do preferences/tastes affect individual consumer demand?
Tastes reflect demand, the greater demand for products lead to an increase in price
An individual will choose to buy goods that will give them the highest level of utility
Consumer tastes and preferences change over time therefore so will demand
How does Advertising affect individual consumer demand?
Advertising can have a major impact on consumers choice and can lead to boosting demand
It can create demand for a good or service that never existed before
What is the income earned from Labour?
Wages –> comes in the form of wage or salary payments –> for labour when consumers participate in the labour market (also includes non-wage income e.g. fringe benefits, employer contributions to superannuation)
What is the income earned from Land?
Land can be a source of income when it is rented –> consumers may own an investment property that generate property income
What is the income earned from Capital?
Interest –> people with greater wealth tend to enjoy a much higher income level because wealth creates ongoing income through returns from owning capital -> for most people their ownership of capital occurs indirectly through superannuation and other investment funds or through the ownership of shares (dividends)
What is the income earned from Enterprise?
Profit –> if a business makes a profit, this is considered return for their use of entrepenurial skill
