Earning%20and%20Spending:%20The%20Consumer

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Earning and Spending The Consumer

• Chapter 5

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What determines INCOME?

• Wages or Salaries
• Payments for labor services
• Rent
• Payment for use of land
• Interest
• Payment for the use of capital
• Profits
• Residual payment to entrepreneurs

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SPECIAL NOTE

• Relationship between CAPITAL and LABOR
• Substitute
• Complement

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Capital Influences on Labor

• Substitute
• When more capital is brought in, less labor is
  needed.
• Worker for a robot.

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Capital Influences on Labor

• Complementary
• Increases in the use of capital causes an
  increase in labor.
• Get more computers for LPS need more techs to
  maintain.

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ANOTHER Special Note

• Special characteristics of rent and the
  relationship to limited supply

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Special characteristics of RENT

• Rent is the payment for a factor that has
  perfectly inelastic supply.
• Level of rent depends ENTIRELY on the demand.

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More Types of Elasticity

• Perfectly elastic
• Quantity demanded changes from zero to infinity
  when there is a price change.

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More types of Elasticity

• Relatively elastic
• Refers to the demand condition in which the
  percentage change in quantity is GREATER than the
  percentage change in price.

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Even More Types of Elasticity??

• Unitary Elasticity
• Demand condition where the change in price is
  equal to the change in quantity.

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Yes! Even more types of elasticity!

• Relatively Inelastic
• Demand condition where the percentage change in
  quantity is SMALLER than the percentage change in
  price.

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And for a finale ..

• Perfectly inelastic
• Demand condition in which there is no change in
  the quantity demanded when the price changes.

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Equation to calculate elasticity

• Q2 Q1 / Q1
• ______________
• P2 P1 / P1

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Consumer Sovereignty decides allocation of
resources

• IF consumers decide what goods and services they
  spend their money on.
• THEN, it makes it profitable for entrepreneurs to
  produce those goods and services
• AND acquire the resources to produce them.
• SO Consumers decide allocation.

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Consumer lingo in Economics

• Average Propensity to Consume
• Percentage after tax income available to spend on
  goods and services.
• Average Propensity to Save
• Percentage after tax income available to save.

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Question to ponder?

• Why is it important to know the APC and APS for
  people?

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What country to you think has the highest APC?

• CHINA!
• Chinese buy more televisions and refrigerators
  than Americans
• The number of computers Chinese buy DOUBLES every
  28 months

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Interested in more about APC and APS?

• Stay tuned for more details!

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How can consumers make better choices?

• Information
• Advertising

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Where do we get information?

• Product reputation
• Brand names
• Government standards and testing
• advertising

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Advertising Types

• Noninformative
• Repetitive
• Deceptive
• Can reduce consumer utility by raising the prices
  of goods and services and by distorting decision
  making.

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Why do you make the decisions you do on what to
buy?

• Veblen Effect
• conspicuous consumption / status seeking
• Snob Effect
• Preference for buying goes down as people
  buying goes up.
• Bandwagon Effect
• Joining the crowd