Chapter 4 - Consumers in the Market Economy

What is consumer sovereignty

Consumers determine what goods and services will be produced by exercising their freedom to choose what they buy and which wants they will satisfy

Goods in high demand and short supply will cause a

price increase

Consumer sovereignty is somewhat diminished by

Marketing

Misleading or deceptive conduct

Planned obsolescence

Anti-competitive behaviour

Y = C + S stands for

Income = Cost + Savings

The average propensity to consume (APC) is

the proportion of total income that is spent on consumption

The average propensity to save (APS) is

the proportion of income that is not spent but saved for future consumption

APC + APS =

1

C/Y =

APC

S/Y =

APS

Whether you decide to spend or save can be influenced by

1. Cultural factors

2. Personality

3. Confidence about the future health of the economy

4. Future spending plans

5. Tax policies

6. Credit availability

7. Income

8. Age

The consumption function shows the relationship between

consumption and income

What does the consumption function depict?

Depicts the demand for consumption goods is not constant but rather increases with income (but at a slower rate)

What does the consumption function suggest

As income rises, consumer spending will rise

Spending will increase at a lower rate than

income

People with high incomes have a lower average propensity to

save

At low incomes, people will spend what proportion of their income

High

The marginal (extra) propensity to consume (MPC) is

the proportion of each extra dollar of earned income that is spent on consumption

The marginal propensity to save (MPS) is

the proportion of each extra dollar of income that is saved

MPC + MPS =

1

What is the formula for MPC

What does the life-cycle theory of conumption state

That consumers save and consume according to their stage of the life cycle, where most of a person’s savings occur while they are of working age

What is dis-savings

Is negative spending - spending money before one has it

When does dissavings occur in the life-cycle

Before work begins and after retirement

Factors influencing consumer choices

1. Income

2. Price of the good or service itself

3. Price of substitute goods

4. Consumer tastes and preferences

5. Advertising

What are sources of consumer income in order from largest percentage to smallest percentage

1. Wages/salaries (54%)

2. Interest from capital and entrepreneurial profits (20%)

3. Rent from land (11%)

4. Government welfare (9%)