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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