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This 13 page Class Notes was uploaded by Samantha Cheatwood on Wednesday January 27, 2016. The Class Notes belongs to FHCE 3100 at University of Georgia taught by Dr. Moorman in Spring 2016. Since its upload, it has received 64 views. For similar materials see Intro to Consumer Economics in Economcs at University of Georgia.
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Date Created: 01/27/16
Intro to Consumer Economics (FHCE 3100) Chapter 1 Economics is the study of science of production, distribution, and consumption. o Economics is the study of how society manages its scarce resources. Society and Scarce Resources o The management of society’s resources is important because resources are scarce. o Scarcity implies choice and choice implies cost. o Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Why should you study consumer economics? o To apply course knowledge to personal decisions. Are the things I purchase sensible decisions? Am I making safe economical decisions? o To apply course knowledge to social issues. What economic legislation affects you? Health care? Cleaner coal burning technology? Screening tests for newborns? o Georgia has increased newborn screenings from 13 to 29. Screening for Down’s syndrome? o To overcome passivity to understand and “own” your place in the economy. o To become a consumer protection advocate. Standing up for consumer rights One person can make a difference Ralph Nader he wrote his senior thesis over the dangers of cars at the time and took on the auto industry to make it safer by requiring seatbelts, airbags, etc. be installed Clark Howard he is a consumer advocate who reports for local news in Atlanta about products Consumers are individuals and groups who obtain, use, maintain, and dispose of goods (or products) and services to fulfill needs and increase satisfaction. Goods and Services o Goods are tangible objects that you can buy such as cars or books o Services are intangible (cannot be transferred) actions of work done such as getting a haircut or a massage Satisfaction is also known as utility, and it ultimately means your happiness and well being as a consumer. (Did the product you purchase fulfill the need you had for it?) Consumers obtain goods, use goods, maintain those goods, and eventually dispose of their goods. The Road to Consumer Economics o Adam Smith (1776): author of “An Inquiry into the Nature and Causes of the Wealth of Nations” which stated that: “consumers act in their own self interest and markets work with the invisible hand” He was the founder of modern economics He felt consumers should be given the freedom and authority to run their own economic affairs The United States’ founding fathers liked the idea that wealth should be based on goods and services produced and consumed by consumers Capitalism is a social system based on the recognition of individual rights. o Under capitalism the state is separated from economics (production and trade), just like the state is separated from church or religion o Being able to freely choose among a vast array of commodities gives people a sense of freedom Consumerism is the belief that goods give meaning to individuals and their roles in society o How does this drive our consumption habits? o Do you buy goods for how others will look at you for it? o Do you only shop at name brand stores? Why? o Who shops at Walmart or Goodwill? People with less income? o (These are just questions to think about to put the concept in context) Goods and Services o We buy goods and services to satisfy wants and needs o Buying goods and services is indeed an act of trust, and this is because we assume our purchases will increase our satisfaction o However, consumption may not always bring satisfaction: Unsatisfactory products Injurious consumption (product is negative in the long run) Consumer Fraud Caveat Emptor: “may the buyer beware” Goods and Services to Meet Human Needs o Needs: are the barest minimum physical necessities that allow you to survive Examples are air, water, food, and shelter Maslow’s Hierarchy of Needs o This is a pyramid that depicts the levels of importance of certain needs for humans o Sel f Act uali ion Esteem Relational Safety Physical This will be on the test so know it well! Wants are what people would acquire if their resources were unlimited (ex. A new car) Resources are the things used to produce other things to satisfy people’s needs and wants o They provide the means to satisfy the family system’s needs Material resources are non human, such as coal or gasoline Human resources are personal characteristics of humans such as knowledge or patience Scarcity means there are not enough resources available to satisfy one’s needs and wants and choices have to be made about the usage of resources. o If Dr. Moorman were really only going to give 5 people an A, then A’s in this class would be a scarce resource and she would have to choose carefully who to give them to. Consumption is thought of as “The Consumption Process” because there are so many aspects of consumption o The Consumption Process (This will be on the test!) Awareness: a stimulus lets you know that there is something you need or want Your computer is broken so therefore you know you need a new one Your friend has a brand new Xbox so that makes you want one too Thinking: the mental exploration of possibilities; the pros and cons about a product; gathering information about a product Planning: deciding on an ordered set of actions needed to make a purchase a reality Will you save $50 from each paycheck to help pay for it? Plan the day you will have all the money together Make a plan to go to a store or on the internet to make the purchase Implementing: sitting down to actually find the best price for a product Actually putting that $50 in the bank from each paycheck Really going and making the purchase Evaluating: spend time reflecting on the outcome of the purchase Is the product in good condition? Did you achieve the desired level of satisfaction? Would you make the purchase again? Factors that influence consumers o Economics The condition of national and worldwide economies during times of decision making The unemployment rate Interest rates Inflation rates o History The background history of each person influences his or her decisions. This includes our own personal histories and also the histories of our families. The history of the area in which the person resides influences consumer decision making as well. o Consumer culture Generally, refers to patterns of human activity and the symbolic structures that give such activity significance. The way people live in accordance to beliefs, language, history, or the way they dress. Culture includes the groups in which an individual or family resides and their behaviors or traditions. o Individual traits Age Eye color Hair color and type Weight Height o Physiological needs Thirst Hunger Safety Housing Protection o Desire for technology Technology includes the methods and materials that individuals use to get what they want. Including machines, techniques, material objects, and processes. o Political area (such as government standards in that area) Politics affect our economic decision making Policies impact our consumption; we have to buy auto insurance if we are going to drive on public roads and now we must buy health insurance as well Medical marijuana (not legal in Georgia so people are moving away to help their sick children where it is legal) Economics and the Business Cycle o Economics is the study of production, distribution, and consumption o The study of how societies use scarce resources to produce valuable commodities and distribute them among different people o The Business Cycle refers to the periodic fluctuations of economic activity. o o Expansion: prosperity, growth, high output, low unemployment, increased retail sales and housing o Unemployment: the government conducts a monthly sample survey called the Current Population Survey (CPS) to measure the extent of unemployment in the country Definition: persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work Specifically, to be counted as “marginally attached to the labor force,” individuals must indicate that they currently want a job, have looked for work in the last 12 months (or since they last worked, whichever is sooner), and are available for work. They are NOT employed, but still not counted as unemployed. It is reported this way to keep up morale and consumer influence Recession is a temporary moderate decline or downturn in economy, declining output, income, employment, and trade. Usually 6 months to one year. o A deep recession is called a Depression Recovery is when economic activity picks up, leading to expansion. Production is on the rise, unemployment declines, and consumer confidence rises. Real Gross Domestic Product is a measure of the value of all goods and services newly produced in a country during some time period, usually one year or one quarter Inflation is the steady increase of prices o Makes the purchasing power of your dollar smaller o Why the phrase “a dollar just won’t buy what it used to” exists Deflation indicates falling prices o Deflation is an issue to producers who now will not make as much money Supply is a fundamental economic conept that describes the total amount of a specific good or service that is available to consumers o An example is the Irish Potato Famine from 18461852, there were NO potatoes available to anyone Law of Supply o As the overall supply of a good or service goes up (increases); generally, the price comes down (decreases) o As the pool of available workers increases; the wages offered decreases o Athens example: AAA Airport Express charges $50 per trip to Atlanta and another $50 back to Athens. ($100 roundtrip) Groome Transportation comes in and only charges $10 for a trip to Atlanta Consumers use Groome instead of AAA, so AAA eventually goes out of business and is bought out by Groome. With no other competition, Groome then increases its price to make more profits. Quantity Supplied o The quantity supplied refers to the amount of a certain product producers are able/willing to offer for sale at each possible price Steaks vs. Dog food As a farmer you decide what your cow gets turned into. It is divided up, part is sold as steak, part as a lesser value cut of meat, and the rest is ground up and turned into dog food. o Means movement along a supply curve due to a change in price o Price changes affect the quantity supplied, but do not impact the overall supply Producer’s View: Quantity Supplied o o A producer will make more of a product that is selling at a higher price Law of Supply o An economic rule stating that the price and quantity supplied move in the same direction o As the price goes up for a good or service, producers of that good or service generally provide larger quantities, all other things being constant. *This is how suppliers or producers react to price changes…NOT consumers o Therefore, if the price of a product that producers are able to get consumers to pay increases, the quantity of that product that the producers are willing to supply should also increase; coincidentally if the price that consumers are willing to pay decreases, the quantity supplied by the supplier should decrease as well This is like parking spaces on game day; there are very few spots close to the stadium, so UGA charges lots and lots of money to park in those spaces, and people are willing to pay it. Why supply curve shifts? o Prices of other goods the supply of one good may decrease if the market price of another good increases, causing producers to reallocate resources to produce larger quantities of the more profitable good o o Prices of relevant inputs if the cost of resources used to produce a good increases, sellers will be less inclined to supply the same quantity at a given price, and the supply curve will shift to the left o Technology technological advances that increase production efficiency shift the supply curve to the right Demand the term demand signifies the ability or the willingness of consumers to buy a particular commodity at a given point of time o Either there is demand for a product or there is not Law of Demand: if nothing else changes, consumers will buy a greater quantity of a product at a lower price than at a higher price o An economic rule stating that the quantity demanded and price move in opposite directions Quantity Demanded: the amount of goods which would be demanded at a particular price o The quantity demanded depends on the price of the good or service. The quantity demanded is determined at any given point along a demand curve in a price vs. quantity plane o o Therefore from a consumer perspective as the price of goods or services rises, the quantity demanded of those goods and services will fall; conversely, as the price falls the quantity demanded will rise Referencing the chart above: as P increases, the demand decreases As P decreases, the demand increases Why Demand Curve Shift? o Customer preference: preferring sneakers to boots o Prices of related goods Complements an increase in the price of a complement reduces demand, shifting the demand curve to the left. (If the price of hot dogs goes up, the demand for ketchup will decrease) Substitutes an increase in the price of a substitute product increases demand, shifting the demand curve to the right (since hot dogs are so expensive, people buy burgers instead and now need ketchup again) o Income an increase in income shifts the demand curve of normal goods to the right o Normal Good/Inferior Good o In economics, normal goods are any goods for which demand increases when income decreases and falls when income decreases but price remains constant. The term does not necessarily refer to the quality of the good. o An inferior good is a good that decreases in demand when consumer income rises Giffen Good o A special type of inferior good may exist known as the Giffen Good, which would disobey the law of demand; this is because when the price of a Giffen Good increases, the demand for that good increases. o This good has to be such a large proportion of a person or market’s consumption that the income effect (change in consumption based on change in real income) of a price increase would produce more demand instead o Example: for a poor family, bread may be a huge part of their consumption. If the price of bread increases, they will give up other more expensive goods so they can still afford bread. Since they’ve given up their other products, they use the money they have left on more bread because that may be all they can afford with the money left. o A Giffen Good may be the least expensive thing you have, but if the price goes up you’ll sacrifice more expensive things for the Giffen Good. Now to satisfy your needs (hunger) you buy more of the Giffen Good because it is still the least expensive thing you’re purchasing despite the price increase. The goal is Equilibrium Price o A price at which the quantity of a good or service demanded is exactly equal to the quantity that is supplied o Changes in the market will change the equilibrium price o Normal Equilibrium Price: o o Increase in Supply: o Increase in supply (shift right) leads to a price drop from P1 to P2; drop in price means consumers will demand a higher quantity of the lower priced good o So why do we go from equilibrium price to a clearance sale price? If the demand for a good decreases, the equilibrium price is now too high, and consumers won’t pay it. So the seller must drop the price to sell the remaining supply (clearance sales) o Sometimes price increases.. If there is a limited supply of a product left on eBay, then a bidding war may ensue and consumers will pay more than the normal (equilibrium) price for a good o Population changes also effect demand If there is a lot of construction work available, then Hispanic Americans may move into an area and increase demand for certain goods or services (such as Latin music on the radio in an area that isn’t normally interested in it) o Population Movement This applies to southern areas such as Florida, Arizona, and Texas Older people living up north will buy property down south for the winter to get away from the cold Demographics and Consumption o Population changes affect consumption patterns Baby Boomers (19451957) now need dentures and rocking chairs Shadow Boomers (19581963) are experiencing their mid life crises Generation X (19631978) are buying homes and furnishings Generation Y (19782000) are either still living at home or in college Consumer Sovereignty o “when consumers decide which goods will survive and to the idea that producers cannot dictate consumer tastes” o Consumers decide which goods survive in the marketplace o When does Consumer Sovereignty exist? When there is perfect competition Many consumers Many producers and sellers Perfect information (Producers need to present product information based on a 6 grade education level) Easy entry and exit into the marketplace Homogeneous products o The Key to Consumer Sovereignty Rests largely on information Consumers with good information vote intelligently with their dollars Barriers to information: Ability to acquire Ability to understand Biased information Producer Sovereignty o Is the concept where producers have the power to decide which products and services society will produce and consume Government Sovereignty: Patient Protection & Affordable Care Act o AKA: Obamacare o The ACA was enacted with the goals of increasing the quality and affordability of health insurance, lowering the uninsured rate by expanding insurance coverage. It introduced a number of mechanisms including mandates, subsidies, and insurance exchanges meant to increase coverage and affordability.
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