Questions On Consumers And Business

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Topic 2 – Consumers and Business
Chap 4 - Consumers in the Market Economy
4.1 - Consumer sovereignty is a concept where consumers decide what goods and services will be produced by exercising their freedom to choose what they buy and which wants they will satisfy.
Aspects of business conduct that reduces consumer sovereignty:
• Marketing – consumer sov diminished by manipulative or deceptive marketing practices
• Misleading or deceptive conduct - deceived by false or dishonest claims
• Anti-competitive behaviour – firms in markets where there are few other sellers
4.2 Decisions to spend of save:
Y = C + S
Y = Disposable (after tax income) C = Consumption expenditure S =Savings

• Average propensity to consume (APC = C/Y) – proportion of total income that is spent on consumption
• Average propensity to save (APS = S/Y) – proportion of total income that it not spend, saved for future consumption
Because each dollar of an individual’s disposable income must be spent or saved, the APC and APS must sum to 1.

Factors that influence decision about whether to spend or save:
• Cultural – people in industrialised economies spend more than East Asian economies, previous generations save more than people today
• Personality – some people more cautions and save for future need, others enjoy immediate benefits
• Expectations of future – expect future rise in income, less likely to save now
• Specific future spending plans – people might save more if planning a major expense in future
• Tax policies – more savings (through lower taxes on superannuation savings) or spend (through abolition of consumption taxes)
• Availability of credit – higher spending if credit is readily available as it creates new source of money for expenditure, able to access credit easily in future

Two most significant factors: income and age
Income
• As income rises, people tend to save higher proportion of income, i.e. APS rises and APC falls – people do not need to spend as much of their income on essential items
• Consumers on lower incomes spend proportionately more of their disposable income than people on higher incomes
• Marginal propensity to consume (MPC) – proportion of each extra dollar of income that goes to consumption
• Marginal propensity to save (MPS) – proportion of each extra dollar of income that is saved
Because each extra dollar of income earned must be either spent or saved, the MPC and MPS must sum to 1.

*The consumption function is a graphical representation of the relationship between income and consumption for an individual or economy. Usually upward sloping with gradient less than one, with positive y-intercept

Age
• Simple consumption theory – individual or household consume a constant proportion of their income each period
• However not the case, they tend of smooth their consumption – if they expect to earn a very high level of income this period and very low/no income in following period, they are likely to save up around half their income this period to have reasonably constant standard of living in both periods
• Young – receive lower levels of income due to lack of skills, experience and education – tend to spend most of income and save very little – often borrow to finance education
• Start working, middle age – incomes rise, tend to consume a small proportion of income as they start saving and accumulating assets for retirement – once retired, consume out of past savings or rely on government pension benefits
• Thus as individual grows older, APC initially falls (as income rises – pay for past debts and accumulate assets for retirement), then rises after retirement (uses saved up money)

4.3 Factors influencing individual consumer choice
• Level of income – higher incomesbuy more items and of higher quality
• Price of good or service – some goods considered necessities for daily life (basic food), consumers likely to reduce demand for other goods (luxury items) as price increases
•
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