The Engine That Runs the Economy

CHAPTER 1 – CONSUMERS

Businesses cannot succeed without customersAs a consumer, you have the power to choose

what and where to buy products and servicesBusinesses spend a lot of time and money

researching what customers wantA good place for businesses to start is by

looking at customer valuesValues – your principles – the standards by

which you liveValues are different for everyone as they are

what you believe is right or wrong

1.1 DECISIONS, DECISIONS

Life values – the principles that are most important to you in life (ex. Spending time with friends/family)

Work values – the principles that are important to you in your work (ex. Working for a company that is environmentally conscious)

Cultural values – principles that are important to you because of your ethnic heritage or religion (ex. Practicing your religion)

Social values – principles that are important to you because of the community in which you live (ex. Wanting to keep your neighborhood safe and clean)

Demographic values – principles that are important to you because of how and where people live (ex. Life events can cause values to change – marriage, children, age, etc.)

TYPES OF VALUES

Goals – the things you want to accomplish in lifeThey come from your values, your needs & wants, and

your hopes and dreamsNeeds – things you cannot live withoutWants – the things that you would like to have but can

live withoutLong-term goals – goals you want to achieve over a

period of years during your life spanLife span – the time from your birth to deathLife-span goals – the most important long-term goals

you hope to reach during your life spanLife-span plan – a strategy people create to help them

achieve their life-span goalsShort-term goals – things you hope to accomplish within

a year

GOALS

Opportunity cost – the value of the next best alternative whenever you make a choice

When you make a decision, there is ALWAYS an opportunity cost

OPPORTUNITY COST

Rational buying decision – a choice made in an organized, logical manner

1. Specify – Identify the need or want that you are trying to fulfill. Determine your goals.

2. Search – Gather information about alternative choices you could make.

3. Sift – Evaluate your options. Consider your opportunity costs.

4. Select – Make a choice and act on it.5. Study – Evaluate the results of your choice.

1.2 MAKE DECISIONS

Every nation has an economic systemEconomic system – the way a nation uses resources

to produce goods and servicesProduction – the creation of goods and servicesResources – things that are used to create other

goods or services Resources can be divided into 2 groups:

1. Human resources – the skills, training, and abilities people have to complete tasks that result in the production of goods and services

2. Nonhuman resources – the raw materials, tools, and manufactured products, such as oil, tractors, and lumber, that are used to make goods and services

1.3 UNDERSTAND ECONOMIC SYSTEMS

Economics – the study of how we make use of our resources.

1. Traditional Economy –Ways to produce products are passed from one generation

to the nextUsually found in tribes in remote areas of the world

2. Command Economy – The government owns most resources and makes most

economic decisionsGovernment decides prices, colors, styles, and amounts

produced Individuals have no say in production or even what your

job will beCuba & North Korea are two examples of command

economies

TYPES OF ECONOMIES

3. Market Economy – (capitalist) People own the resources and run the businesses The purpose of most businesses is to make a profit Profit – the difference between the money received from

selling a product and the cost of producing that product Businesses are free to choose what products and services

they offer Customers are free to buy whatever products and services

they choose without government involvement

4. Mixed Economy – The U.S. is predominantly a market economy but the

government does have some regulations that businesses have to follow for the protection of citizens

CONTINUED

The problem facing every economy is scarcityScarcity – the situation in which consumers’ wants

are greater than the resources available to satisfy those wants

Every society must decide what it will use its scarce resources to produce

In a market economy, the choices consumers make determine how a society’s scarce resources will be used

Consumers decide: What will be produced How much will be produced What prices will be

DEMAND AND SUPPLY

Demand – the quantity of a good or service that consumers are willing and able to buy at various prices during a given time period

Demand curve – the relationship between price and quantity demanded

As price goes up, quantity demanded goes downAs price goes down, quantity demanded goes up

DEMAND

Price

Quantity DemandedD1

Supply – the quantity of a product that producers are willing and able to make available for sale at various prices over a given time period

Supply curve – the relationship between price and quantity supplied

As price goes up, quantity supplied goes upAs price goes down, quantity supplied goes down

SUPPLY

Equilibrium price – the price at which the quantity supplied exactly equals the quantity demanded

At equilibrium, consumers are willing and able to buy the same amount of the product as producers are willing and able to supply

EQUILIBRIUM

Surplus – when prices are set above market equilibrium, consumers will buy less of the product (THINK: high prices)

Shortage – when prices are set below market equilibrium, consumers will by more of the product (THINK: sale prices, Black Friday Sales, etc.)

SURPLUS & SHORTAGE

In the market economy, consumers and businesses operate without government involvement

There is always an exchange of information in the market economy

When consumers purchase products, retailers (businesses) gain information about their buying habits

This can help the retailers know what items are popular and to restock and which should be discontinued

This, in turn, impacts the manufacturersManufacturers may need to obtain more resources to

help produce the materials needed for retailers to sell products

Prices also provide information that influence the market economy

CONSUMER’S ROLE IN THE ECONOMY

The main reason people are in business is to make a profit

There are generally 3 ways to increase profit:1. Reduce costs2. Change prices3. Increase quantity of products sold

THE PROFIT MOTIVE

Consumer – anyone who buys or uses productsConsumer economics – the study of the role

consumers play in an economic system

CONSUMER ECONOMICS

Competition – the contest among sellers to win customers

It exists when several companies offer similar products for sale

Competition is the driving force behind the market economy

It forces businesses to serve the consumersBusinesses must offer good, quality products that

consumers want and at a fair price

COMPETITION

Businesses need to use resources wisely to make a profit – resources cost money!

Business want to produce at low costs and sell products at a price consumers are willing to pay while still making a profit

3 things profitable companies do:1. Sell products consumers want to buy2. Sell products at a price consumers are willing to pay3. Take in more money from sales than the company

spends to produce the products

EFFICIENCY & PROFITS

Advertising – a paid form of communication sent out by a business about its product or service

Types of Advertising:1. Brand advertising – the purpose is to cause you to

remember a particular brand nameOften used when introducing new productsUses jingles and slogansEffective because if you have a good experience with

a brand, you’re likely to buy it again In order to pay for advertising, a lot of your brand

name products are more expensive (ex. Mountain Dew vs. Mountain Lion)

CH. 1.5 – ADVERTISING AND CONSUMER DECISIONS

2. Informative advertising – designed to influence you to buy a product by educating you about the product’s benefitsOften used for complex or highly technical products

that consumers may not understandProvides information that helps you make a good

buying decision

3. Comparative advertising – businesses try to win your favor by comparing its product’s qualities to those of a competing productGoal is to convince you to buy the advertised product

instead of the competition’s

4. Defensive advertising – used to counter attack comparative ads from other companiesThe company is trying to convince you that its

product is the best choice

5. Persuasive advertising – designed to appeal to your emotions to influence you to buyFocus on creating a desire to buy the product rather

than on providing information

Businesses advertise because they believe it will help them earn a profit

YOU help to pay the cost of advertising! – It is built into the prices you pay for goods and services

Consumers MAY benefit from advertising – if sales increase, it can help businesses lower production costs which can help lower prices

BENEFITS AND COSTS OF ADVERTISING

Deceptive advertising – deliberately designed to mislead customers

Contain factually wrong statementsThe government has the power to require companies

to stop advertising deceptively by imposing heavy fines if they don’t

Ex. “Product X cures wrinkles forever”Additionally, “free” gifts with the purchase of a

product have been ruled as deceptivePuffery – innocent exaggerations used to sell productsThese exaggerations are perfectly legalEx. “Product X reduces the appearance of wrinkles

and makes you look and feel younger”

DECEPTIVE ADS VS. PUFFERY

Your choices as a consumer can impact your local community and communities around the world

Consumers need to share limited resourcesSociety limits your freedom of choiceThe government usually sets regulations on these

limitsYou are entitled to freedoms so long as they do not

endanger other people

CH. 1.6 BE A RESPONSIBLE CONSUMER

Once used, some natural resources cannot be replaced quickly

Others can’t be replaced at allSome people try to reduce the amounts of natural

resources they useOthers try to use as many as they are able to buyGlobal warming – the gradual increase in the earth’s

average temperature

USING NATURAL RESOURCES

Hybrid carsReduce water usage & don’t pollute itRecycling paper products and reducing usageReducing garbage createdBuying from socially responsible companies (“green”

companies)Follow rules and regulations for disposing of waste

WAYS CONSUMERS CAN REDUCE NATURAL RESOURCES