Topic 2: Consumers and Businesses Flashcards
What is consumer sovereignty
Consumers have power over businesses on what and how much to produce
Consumers ultimately determine which goods and services can and should be produced by having the freedom to choose what they buy
What factors can reduce consumer sovereignty
Advertisement (persuades consumers thinking they need it)
Misleading/deceptive conduct (weight loss products),
planned obsolescene (Product breaking down in a few years),
anti-competitive behavior/monopoly behaviours (firms coming together, making a set price, making consumers have less options to buy cheaper
How to calculate average propensity to save and consume
APS = Savings (s) / Income (Y)
APC = Consumed (c) / Income (Y)
How to calculate the marginal propensity to save and consume
MPS = change in S / change in Y
MPC = change in C / change in Y
How to calculate total savings and consumption
Consumer spending -
C =C0+ (mpc x Y)
Consumer savings
C =S0+ (mps x Y)
(C0/S0 = Autonomous consumption/savings)
what factors influence consumer spending and saving/dissaving
Consumer decision is influenced by internal and external factors
Income - People earning more, have higher income, usually save a higher proportion of their income
People earning less, spend more, to buy the daily necessities
Age - REMEMBER TRIANGLE GRAPH (dissavings below, savings above), 3 stages influencing consumption - School - Low-income job, spend more, borrowing, lack of experience, dissavings
Middle aged - Job, working, saving more for the future, savings (above the graph)
Retired - Not working anymore, no income coming in, starts consuming from past savings and wealth, dissaving (fall from savings)
Culture - Some cultures are known for their tendency to save, being more conservative in their spending
Personality- Some people like to be cautious, whilst others would rather spend their money
Future- Some may start saving if they think their business or the economy will do badly next year, or might lose their job
Some may spend because they got a promotion, meaning more disposable income
What is a utility
the pleasure/satisfaction/enjoyment derived from consuming a good or service.
What factors influence individual consumer choices
Income - More money, afford more stuff, able to buy higher quality of goods and services
e.g individual flying business, while pensioner might only afford to drive to the coast for weekend, each making a choice to be as happy as possible with the available funds
Price - Necessities: People will purchase necessities regardless of price change. While they will reduce their demand for other goods (luxury goods) as price increases
Price increase = Demand decrease
Price decrease = Demand increase
Price of substitutes (similar goods) - Price of sub increases, consumers will likely purchase the original good. e.g butter and margarine
Price of complements goods - Goods used in combination with another good. If price of complement increases, consumers will less likely buy the original good e.g car and petrol
Consumer taste/preferences- Consumer generally buy good that gives them higher level of personal satisfaction, things that will give them highest level of economic utility.
NOTE: preferences change over time - fashion, technology
Advertising - Can generate demand, convincing consumers they need/want the good, can decrease consumer sovereignty e.g price, creating previously non-existent demand
What are the return of factors of production
Land: Rent
Property
Labour: Wage/salary
Supplying labour to production process
Capital: Interest
Capital goods are man made machinery, tools, equipment, used to produce G&S
Enterprise: Profit
Knowledge and skill to create a business
What is social welfare the the main areas og gov. welfare spending
Social welfare: is the collection of tax, redistributed to consumers and families in need of assistance by the the government. Designed to provide minimum income safety net to all consumers in society to purchase basic necessities of life
Major areas:
Aged pensioners
Disabled
Family support
Whats a firm
An organisation involved in using the FOP in order to produce a G/S and crete profit
Whats an industry
A collection of business firms involved in making same product and generally complete with each other (coal, electricity)
What are firms decisions on G/S
What to produce? - Determined by the skills and experience of the business operator, consumer demand, specific business opportunities (where to start a business, where there is less competition), amount of capital required ($$)
How much to produce? - Determined by the level of consumer demand for the product / service.
How to produce? - How to combine inputs in order to create outputs. Firms wo; choose a combination of resources that is most efficient in order to maximise consumer satisfaction and minimise production costs and waste. Dependent on: quality of resources, availability of technology, how to deal with waste. Can change over time with tech advancements
What are the goals of firms
- Maximise profits
- Maximise growth
- Increase market shares
- Meet shareholder expectations
- Satisficing
Explain the goals of the firms
- Maximise profits
Profit = Total revenue - Total cost
Can lead to economic growth, infrastructure and regional development, employment, product capacity - Maximise growth
To maximise rate of growth of firm’s assets, the more FOP, the more they can produce in the future, larger assets = higher profits, accumulating assets to grow the company - Increase market shares
% of total sales in industry generated by particular company
-Firms want to increase market shares to limit their competition and ensure increased profits in the future, it leads to greater sales - Businesses will try to take action to maximise their share price
- Meet shareholder
expectations - Shareholders invest their money with a hope of seeing value of company rises
- Satisficing
Not worrying about profit, aims to satisfy a goal in each area for long term gain, they attempt to achieve acceptable levels of performance across a range of business objectives
e.g helping the homeless, saving endangered species
