Consumers in the Economy Flashcards
(34 cards)
What is consumer sovereignty?
Consumers will ultimately decide what goods and services are produced in an economy by exercising their freedom to choose between wants. Businesses will then produce what ever goods are in demand.
Describe how consumer sovereignty works.
Where consumer demand is high relative to supply for a good, the price will rise. Producers will then shift resources to that area of production to make more profit.
Describe how consumer sovereignty alters resource allocation during economic upturns and downturns.
During upturn, higher incomes will increase demand for luxury goods, and vice versa.
Which economic questions does consumer sovereignty address?
Consumer sovereignty impacts resource allocation in an economy, and by answering the questions of what to produce, and how much to produce.
Identify the factors that limit or reduce the effect of consumer sovereignty.
Marketing, deceptive conduct, planned obsolescence, anticompetitive behaviour
It is argued that these factors create a degree of business sovereignty
Describe how marketing influences consumer sovereignty.
Marketing can manipulate consumer behaviour, create hype for a product, and create artificial demand by convincing consumers to want the product
Describe how deceptive business conduct influences consumer sovereignty.
False or dishonest claims can manipulate consumer decisions, causing them to demand products they wouldn’t buy naturally.
Describe how planned obsolescence influences consumer sovereignty.
As firms may design goods that wear out quickly, they create a need for consumers to buy more of their product
Describe how anticompetitive behaviour influences consumer sovereignty.
In markets with low levels of competition, consumer choice is limited and buyers may settle for products they otherwise wouldn’t demand
What is the equation for disposable income?
Once tax has been paid, consumers either spend or save.
Y = C + S
Y is disposable income, C is consumption, S is savings
What is the average propensity to consume?
The proportion of an individual’s income spent on consumption.
APC = C/Y
What is the average propensity to save?
The proportion of income saved.
APS = S/Y
Identify the factors that influence the decision to spend or save.
Cultural, personality, future expectations, spending plans, tax policies, availability of credit, income and age.
Describe what occurs to saving and spending as income rises
As income rises, people tend to save a higher proportion of their income. APS rises and APC falls. As income rises, people do not need to spend as much of their income on needs.
Describe what occurs to saving and spending at lower income levels
Consumers on lower incomes spend proportionally more of their disposable income
What is the consumption function?
C = Co + MPC x Y - shows the relationship between income and consumption
- Upward sloping, gradient < 1.
Co is autonomous consumption - positive y-int.
MPC x Y - how much of additional income is used
What is the marginal propensity to consume?
The proportion of each extra dollar of income that is spent.
MPC = change in consumption / change in income
What is the marginal propensity to save?
The proportion of each extra dollar of income that is saved.
MPS = change in saving / change in income
What is the life cycle theory of consumption?
The theory that describes the saving and spending patterns of an individual in their early life, middle ages, and retirement.
What does the life cycle theory of consumption outline about young people?
Young people receive low levels of income, or even borrow, as they lack skills, experience, and a complete education. So they save very little.
What does the life cycle theory of consumption outline about working age people?
Working age people have rising incomes, and they will consume an increasingly smaller portion of their income, and their savings increase, for retirement,
What does the life cycle theory of consumption outline about retirement aged people?
Retirees no longer earn an income and they consume out of past savings or rely on pensions.
How does income level influence consumer choice?
As individuals earn more income, they choose to buy more items, and higher quality items.
How does price influence consumer choice?
Necessities will be bought regardless of price, but as price increases, demand for other goods decreases
