Preliminary Exam Topic 2 Flashcards
Define ‘CONSUMER SOVEREIGNTY’
Refers to the manner in which consumers. collectively through market demand, determine what is produced and the quantity of production.
No demand = No Producer Making it = No Product
Strength if market economies
How do consumer income levels determine the types of production taking place in an economy?
- Increase in income - increase in desire for luxury goods
Consumers also effect price - high levels of demand will be reflected in the price (price increase)
List the four factors that decrease consumer sovereignty / control:
- Marketing (Manipulative)
- Misleading/Deceptive conduct (Dishonest claims)
- Planned Obsolescence
- Anti-competitive behaviour (Monopoly)
Define ‘AVERAGE PROPENSITY TO CONSUME’
The proportion of total income that is spent on consumption
Define ‘AVERAGE PROPENSITY TO SAVE’
The proportion of total income that is not spent but rather saved for future consumption
Define ‘MARGINAL PROPENSITY TO CONSUME’
The proportion of each extra dollar of earned income that is spent on consumption
Define ‘MARGINAL PROPENSITY TO SAVE’
The proportion of each extra dollar of earned income that is not spent but saved for future consumption
LOW INCOME HOUSEHOLDS
APC: High / Low
APS: High / Low
MPC: High / Low
MPS: High / Low
APC = HIGH
APS = LOW
MPC = HIGH
MPS = LOW
Low income households will spend a large portion of their income and have a low propensity to save.
As a proportion food and other necessities will take up a much greater proportion of their total income than someone with a large amount of income.
HIGH INCOME HOUSEHOLDS
APC: High / Low
APS: High / Low
MPC: High / Low
MPS: High / Low
APC = LOW
APS = HIGH
MPC = LOW
MPS = HIGH
High income households will spend a small portion of their income and have a high propensity to save.
Define ‘CONSUMPTION FUNCTION’
Graphical representation of the relationship between income and consumption for an individual or economy.
Usually upwards sloping
Y -intercept is positive (more than zero)
Why doesn’t the consumption function start at (0,0)
Curve does not start from the origin because at zero level of income, the consumption is not zero. There is a certain minimum consumption in order to survive (autonomous consumption.
Define ‘AUTONOMOUS CONSUMPTION’
the minimum level of consumption that exists for basic necessities, such as food and shelter, even if a consumer has zero income.
List the factors that influence levels of spending and saving (up to 6)
Income levels and future expectations
Life stage and age distribution
Cultural/Personality factors
Confidence and future expectations
Government policy: The government can influence patterns of consumption and savings by making it more attractive to save (such as through lower taxes on superannuation savings) or to spend (such as through the abolition of consumption taxes).
Availability of credit: Spending is likely to be higher if credit is cheap and is readily available, as this creates a new source of money for expenditure.
What are the two most significant factors that influence a consumers decision whether to spend or save?
INCOME AND AGE
What is the life cycle theory of consumption?
The life cycle theory of consumption posits that individuals plan their consumption and savings behavior over their lifetime, taking into account their expected income at different stages, such as during youth, peak earning years, and retirement. According to this theory, people aim to maintain a stable standard of living by smoothing consumption over time, leading to saving during high-income periods and dissaving during low-income periods.
The theory states that individuals seek to smooth consumption throughout their lifetime by borrowing when their income is low and saving when their income is high.
What are the main factors affecting a consumer’s expenditure choices? (5)
- The level of income
- The price of G&S
- The price of substitute and complement Goods
- Consumer tastes and preferences
- Advertising
What does it mean when I say there is a positive (correlation) relationship between income and consumer consumption.
Increases in income result in increases in consumption spending VICE VERSA
Define ‘NORMAL GOOD’
A good that experiences an increase in its demand due to a rise in consumer income.
Define ‘INFERIOR GOOD”
Goods whose demand goes drops when people’s income rises. When incomes are low, inferior goods become a more affordable substitute for a more expensive good.
What does it mean that consumer demand is inversely related to price?
Increase in price of G&S, consumers will react by buying less of it since more disposable income is needed to buy the same quantity of the G&S before the price rise
Decrease in price of G&S, consumers will react by buying more of it since less disposable income is needed to buy the same quantity of the G&S before the price decrease
Some goods are considered necessities and people will need to buy them regardless of price changes.
Define ‘SUBSTITUTE GOOD’ give example
Goods and services that can be used as alternatives to other goods and services in consumption.
Coke & Pepsi
Oat Milk and Almond Milk
Etc
Define ‘COMPLEMENT GOOD’ give example
Goods and services that are used in conjunction with each other in consumption.
Fuel and car
Where does consumer income mainly come from?
Return on resources such as labour, land, capital and entrepreneurial initiative (enterprise) - the factors of production.
Consumer income can also come from the government in the form of social welfare.
What is earned income?
Wages and salaries are termed ‘earned income’ since people must work as employees for private and government businesses to receive/EARN wages and salaries as income.
What are the main sources of earned income in Australia?
Wages and Income
Define ‘SUPPLEMENTS’ (in terms of income)
extra earnings such as wages for overtime, penalty rates, allowances for travel, clothing, meals, accommodation, tips and bonuses.
Define ‘WAGES’ - where are wages more common?
fixed regular payment earned for work or services, typically paid on a daily or weekly basis.
Are more common for part time and casual jobs where hours are inconsistent.
Define “SALARIES” where are these more common?
a fixed regular payment, typically paid on a monthly basis but often expressed as an annual sum, made by an employer to an employee, especially a professional or white-collar worker.
are more common for full-time jobs where hours are more consistent.
Where does unearned income come from? Examples?
Unearned income comes from sources where you do not contribute labour directly to work to receive/earn a wage or salary.
Examples include:
Rent from ownership of property and land
Shares of stocks
Dividends from shares
Ownership of a business
Interest from savings/capital
THE 4 FACTORS OF PRODUCTION AS A SOURCE OF INCOME
Wages from labour: main source of income for consumers. It comes in the form of wage or salary payments for labour when consumers participate in the labour market.
It also includes non-wage income such as fringe benefits, employer contributions to superannuation, and workers’ compensation payments.
Rent from land: Land is a source of income when it is rented. For example, consumers may own an investment property that generates property income.
Interest from capital: Returns on capital are a significant source of consumer income. For most consumers, their ownership of capital occurs indirectly through superannuation and investment funds.
They may earn interest on savings held in cash management accounts or bonds.
Profit from entrepreneurial skills: Many Australians are involved in operating businesses (especially small). If the business makes a profit it’s considered a return for their use of entrepreneurial skill.
