Topic 2: The role of consumers in an economy

Question 1

What is consumer sovereignty?

Answer 1

Consumers determine the answer to the question of what to produce and the Q of it due to their freedom to buy whatever G or S to satisfy specific wants.

Question 2

name aspects of business conduct that can reduce consumer sovereignty

Answer 2

marketing
misleading or deceptive conduct
planned obsolescence
anti-competitive behaviour

Question 3

how does marketing reduce consumer sovereignty?

Answer 3

most marketing strategies are geared towards understanding their target audience to manipulate their decision-making. Marketers undergo extensive research to understand consumers’ wants, interests, desires, and fears through mass and direct marketing.

Question 4

define mass marketing

Answer 4

the process of appealing to an entire market rather than on targeted group through television, radio, print media etc.

Question 5

define direct marketing

Answer 5

the process of appealing to a targeted audience rather than the broader market through targeted social media advertisements and the use of social media influencers.

Question 6

how does misleading or deceptive conduct reduce consumer sovereignty?

Answer 6

misleading or deceptive conduct deceives consumers through false claims about a product, making consumers buy things that they did not necessarily want to buy in the first place

Question 7

how does planned obsolescence reduce consumer sovereignty?

Answer 7

when firms calculate when a product is due to be replaced, sometimes they would purposefully make a product become quickly obsolete (out of date) to encourage consumers to make further purchases in the future.
this takes advantage of the way consumers want to have the latest releases of products.

Question 8

how does anti-competitive behaviour reduce consumer sovereignty?

Answer 8

firms will purposefully produce products that are best compatible or only compatible with the other products that they offer (apple and their stupid earphones).
firms that operate in mkts where there are few other sellers can also diminish consumer sovereignty.

Question 9

What is Y=C+S

Answer 9

Y = Income after tax (disposable income)
C = Consumption expenditure
S = Savings

Question 10

define ‘Average propensity to consume’ (APC) + formula

Answer 10

the proportion of total income that is spent on consumption
C/Y=APC

Question 11

define ‘Average propensity to save’ (APS) + formula

Answer 11

the proportion of total in come that is not spent but is saved for future consumption
S/Y=APS

Question 12

What are the factors that influence the levels of spending and saving in an economy?

Answer 12

income levels and future expectations: higher income = more opportunity to save, people tend to save when they are unsure about their future income

cultural factors: decisions are influenced by individual personality factors

confidence and future expectations: less confident in economic outlook, job stability, or future income = save, more confident = spend

life stage and age distribution: spending and savings behaviours change over time.

government policies: gov can influence decision making by making it more appealing to spend/save. (lower tax, abolition of consumption tax etc)

availability of credit: easy access to credit tends to lead to spending

Question 13

What happens to APC and APS when income rises? Why?

Answer 13

APS rises and APC falls - when income rises, people don’t need to spend as much of their income on essential items

Question 14

What is the ‘consumption function’

Answer 14

a graphical representation of the relationship between income and consumption of an individual or an econ.
- upward sloping
- gradient less than one

Question 15

define ‘marginal propensity to consume’ (MPC) + formula

Answer 15

the proportion of each extra dollar of earned income that is spent on consumption
MPC = change in consumption/change in income

Question 16

define ‘marginal propensity to consume’ (MPS) + formula

Answer 16

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

Question 17

MPS + MPC = ? (why)

Answer 17

= 1 because each extra dollar of income earned must be either spent or saved

Question 18

Explain the life cycle theory of consumption

Answer 18

younger people tend to receive lower incomes because they lack skill, experience and education. Therefore, they tend to spend most of their income and save very little and will most likely resort to borrowing money.
As they get older and get a higher income, they will consume a smaller portion of their income and save more assets for retirement.
in retirement people no longer have income from their labour so they rely on past savings or government’s age pension.

Question 19

define utility

Answer 19

utility is the satisfaction one receives from the consumption of G&S

Question 20

What are the 5 main factors influencing individual demand

Answer 20

• level of income
• price of G&S
• price of substitute and complement G
• consumer tastes and preferences
• advertising

Question 21

how does the level of income impact consumer spending

Answer 21

as their income gets higher, they tend to buy more items and items of higher quality

Question 22

how does the level of price of G&S impact consumer spending

Answer 22

consumers need to decide whether or not they are willing to buy an item for its given price. However, if the item is a necessity, people will still buy it because they NEED it and will not reduce D for it greatly. Unlike non-necessity items like luxury G, the D for them will drop because individuals don’t need it and would rather spend their income on necessities.

Question 23

how does the price of sub and complement G impact consumer spending

Answer 23

the D for a G at any time will be affected by the prices of other G.
As the D goes up for smth, the D of the sub of it will also increase
As the D goes up for smth, the D of the complement of it will also increase.

Question 24

how does consumer tastes and preferences impact consumer spending

Answer 24

Some G&S will give an individual consumer higher utility than others.
A consumer’s taste also changes over time, and so will the demand for particular G

Question 25

how does advertising impact consumer spending

Answer 25

advertising has the power to create demand for a particular G or S where none existed before. Advertising can make D for G&S less responsive to price increases by building consumer loyalty to particular brands over time.

Question 26

define social welfare payments

Answer 26

payments made to increase the income of those in need of assistance by the gov

Question 27

where does the gov get the funds for social welfare payments

Answer 27

taxation

Question 28

examples of social welfare payments

Answer 28

• age pension: older than 67 and retired
• parenting payment: carers of young children (situational)
• disability support pension: people with a permanent disability that stops them from working
• JobSeeker payments: 22-67 who are seeking work but cant find it

Question 29

what is the aim of social welfare payments

Answer 29

provides a minimum income safety net for consumers to buy the basic necessities of life