Role of consumers, businesses in the Market Economy (ME 4-5) and some additional info Flashcards
Chapter 4-5
Difference between product market and factor market
Product market
- market used to exchange products
Consumer sovereignty
- consumers determine what is produced by exercising their freedom to choose what they buy and what wants they will satisfy
- businesses will produce whatever goods and services are in demand
Strength of market economy for consumers
consumer sovereignty lead to production geared towards what people want and their wants are satisfied
Process of Consumer Sovereignty
- customers send signals to producers through their demand for goods and services
- when their demand is high relative to supply, prices will rise.
- Producers realise that higher profits can be made by producing those items for which profit is greatest
- shift resources into those other forms of production
thus consumer sovereignty determines how resources are allocated in an economy.
*also what to upgrade
How does income levels impact consumer sovereignty?
consumer income levels determine types of production that occur in an economy.
- more prosperous and income levels rise: demand for luxury goods increases, so does their production
- production of these items will fall in an economic downturn
Several aspects of business conduct can reduce the sovereignty of consumers, what are they? (no need explanation)
Marketing, misleading or deceptive conduct, planned obsolescence, anti-competitive behaviour
How does the marketing aspect of business conduct reduce the sovereignty of consumers?
- advertising and direct marketing exert a powerful influence over the spending patterns of consumers
- most place strong emphasis on understanding their target consumers in order to influence their behaviour: wants, interests, desires, fears
- then use this info for both mass marketing: tv, radio, print media, and direct marketing: targeted social media ads, social media influencers, emails
- these manipulative practices diminish consumer sovereignty
How does the “misleading or deceptive” aspect of business conduct reduce the sovereignty of consumers?
- consumers can be deceived by false or dishonest claims about a product
- leading them to purchase products that do not do what they claim they do
- common in weight-loss supplements, anti-aging products, investment schemes, etc
How does the “planned obsolescence” aspect of business conduct reduce the sovereignty of consumers?
- intentional production of goods that are designed to wear out quickly or go out of date
- encouraging further consumption of the product in the future
- emphasise importance of keeping up with latest technology and most recent products
- e.g. apple, new and improved features in phones even if old version functions perfectly
obsolescence
no longer used, out of date
How does the “Anti-competitive behaviour” aspect of business conduct reduce the sovereignty of consumers?
- a market with only a few sellers
- can intentionally create small market by manufacturing electronic devices so that only company’s brand of accessories, e.g. power supply cords and batteries are compatible
- strategy to reduce consumer choice and try to manipulate consumers into purchasing more products from the same business
Utility
The satisfaction or pleasure that individuals derive from consumption of goods and services.
Economists assume that in their expenditure decisions consumers aim to maximise their _______
utility
What constraints consumers’ ability to increase their utility?
- level of income
- market price of goods and services
What are the main factors affecting the consumer’s expenditure choices?
- level of income
- price of goods and services itself
- price of substitute and complement goods
- consumer tastes and preferences (affected by seasonal foods and specific holidays like Christmas)
- advertising (word of mouth)
How does the level of income of consumers impact their choices?
- consumers earning higher income tend to choose to buy more items and items of higher quality.
- e.g. a cruise ship holiday might increase the pensioner’s level of utility, but the pensioner may then not have enough income to satisfy other wants in the future
How can house prices impact choices of consumers?
- Rising house prices makes people feel wealthier= “wealth effect”
- makes them more likely to spend money
- very little impact (0.75-1.5%)
How does the price of goods and services impact the choices of consumers?
- consumers need to decide whether they are willing to pay the nominated price for the item, given their level of income
- some goods are necessities and people will need to buy them regardless of price, therefore unrelated
- basic food= unaffected, gourmet food= more responsive to price changes because not essential
- consumers likely to reduce demand for luxury items when prices increase
How does the price of substitute and complement goods impact individual consumer choice?
- quantity of a good demanded at any time will be affected by the prices of other goods
- if the price for one increase, the demand for a cheaper substitute will increase
- e.g. rival ridesharing apps
- alternatively, people are likely to purchase complement goods together, thus fall in price of one will increase demand for it as well as its complement (e.g. iPhone and airpods)
How do consumer tastes and preferences impact individual consumer choice?
- an individual will decide to purchase those goods and services that give them the highest level of utility
- some goods and services will give an individual consumer a higher level of satisfaction than others
- generally assume that higher quantity of most goods increases consumer utility
- can change by experimentation and learning
- changes over time, thus demand changes too (e.g. fashion)
- innovation and technological process lead to consumers demanding new and better products at the expense of older ones
How does advertising influence individual consumer choice?
- can create demand for particular good or service where none existed before
- can build consumer loyalty to particular brands over time
- e.g. social media, billboards
What is a type of consumer income that does not come from providing the four factors of production?
Social welfare.
Describe wages as a return to factors of production.
- main source of income for consumers
- comes when consumers participate in the labour market
- also includes non-wage payments like fringe benefits(stuff like health insurance), employer contributions to superannuation, workers’ compensation (stuff u get if you get hurt at work)
