Consumers in the market economy:
4.1 Consumer Sovereignty * Consumer sovereignty refers to the manner in which consumers collectively though market demand; determine what is produced and the quantity. * Consumers in a market economy determine what is produced. * Consumers ultimately decide what goods and services will be produced by having freedom of choice. * Business firms will produce whatever goods and services are in demand. This is known as consumer sovereignty. Consumer sovereignty can decide how resources are allocated in an economy * Where demand is high relative to supply prices rise. Produces notice that higher profit can be made by producing items in high demand. * Marketing: advertising and direct marketing have great influence on spending patterns within consumers. Most strategies aim to manipulate and persuade the consumer * Consumer sovereignty is diminished by manipulative market practices. * Misleading or deceptive conduct: consumers can be deceived by dishonest claims about a product leading them to buy items they don’t really want to. * Planned Obsolescence: goods that are designed to wear out quickly or go out of date in order to encourage consumers to buy future products. e.g. kettle * Anti-competitive behaviour: Firms that operate in markets where there are few other sellers can also diminish the ability of consumers to choose what they really want. * Some critics argue that a great deal of consumer demand for goods and services is falsely manufactured by marketing practices. * Others argue that these practices are natural part of the economy.
4.2 Decisions to spend or save * For a specific level of income, any increase in consumption will cause an equal reduction in the level of savings. APC + APS =1 * Any change in the level of income will result in a change in the levels of both consumption and savings as the autonomous level of saving alters others. * The proportion of income spent on consumption is called average propensity to consume (APC). * The proportion of an individual’s income which is saved is known as the average propensity to save (APS). * The APC and the APS must add to 1. * There is a variety of factors which influence decision about whether to spend or save. * Personality factors: some prefer to save and are more cautious in case of any future need, whilst others prefer to spend. * Expectations of the future: people who expect their income to rise in the future are less likely to worry about savings now. * Any specific future spending plans: individuals might save more if they are planning a major expense in the future, such as a holiday or purchasing a car. * Tax policies: the tax system can influence an individual’s patterns and consumption and savings by making it more attractive to save or to spend. * Availability of credit: spending is likely to be higher if credit Is readily available, as this creates a new source of money for expenditure. * The two most significant factors that influence a consumer’s decision to spend is income and age.
Income
* As income rise, people save a higher proportion of their income. * Consumers on a lower income spend proportionately more of their disposable income. * The marginal propensity to consume (MPC) is the proportion of each extra dollar that goes to consumption * Autonomous spending is considered automatic and necessary, whether occurring at the government level or the individual level. * The marginal propensity to save (MPS) is the proportion of each dollar of income that is saved. * MPC +MPS=1
Age
* An individual’s income and propensity to consume is not constant throughout their life. * Individuals and households tend to smooth their consumption if they expect to earn a very high level of income this period, they will save, if they expect very low income, they cannot save as much, and must spend.