Consumption Consumers play an important role in the economic system. Consumer: any person or group that buys or uses goods and services to satisfy personal needs and wants.

What do consumers buy?

Disposable and Discretionary Income A person’s role as a consumer depends on his or her ability to consume. This ability to consume depends on available income and how much of it a person chooses to spend now or save for future spending. Disposable income: the money income a person has left after all taxes have been paid. People first spend disposable income on necessities like food, clothing, and housing. Look at page 60’s chart of consumer spending.

Discretionary income: Leftover income that can be saved or spent on extras such as luxury items or entertainment. Education, occupation, experience, and health all influence a person’s earning power and thus his/her ability to consume. Look at the chart on page 61 that shows how education affects income. Where a person lives can also influence how much a person earns: city dwellers tend to earn more than those in rural areas and some regions of the country tend to be higher also.

Decision Making as a Consumer Decision making involves three parts: Scarce resources: income and time Opportunity cost Rational choice Choosing the alternative that has the greatest value from among comparable-quality products.

Consumerism: The Lemon Law: A movement to educate buyers about the purchases they make and to demand better and safer products from manufacturers The Lemon Law: Consumers must be proactive in their buying habits.

Consumer Rights: 1962 President John F. Kennedy—first protection message to Congress The right to safety—protection against goods that are dangerous to life or death The right to be informed---information for use not only as protection against fraud but also as the basis for reasoned choices The right to choose---the need for markets to be competitive (have many firms) and for government to protect consumers in markets where competition does not exist, such as electronic service The right to be heard---the guarantee that consumer interests will be listened to when laws are being written

President Nixon added a fifth right: The right to redress---the ability to obtain from the manufacturers adequate payment in money or goods for financial or physical damages caused by their products Using President Kennedy’s list, Congress passed consumer-protection legislation. his "finest achievement" in consumer protection

How did this legislation help consumers? Dissatisfied consumers can complain to a store manager or write to the manufacturer. Consumers may take a case to small claims court or hire a lawyer. Local citizens’ action groups and local chapters of the Better Business Bureau help consumers with their rights and complaints. There are also many federal bureaus to help consumers. Read over the list of the federal bureaus on page 74 of your economics' book.

Consumer Responsibilities:

Credit Receipt of money either directly or indirectly to buy goods and services in the present with the promise to pay for them in the future. The amount owed—the debt—is equal to the principal plus interest. Principal: amount of money originally borrowed in a loan Interest: amount of money the borrower must pay for the use of someone else’s money

Remember this: Taking out a loan is the same as buying an item on credit. In both cases, you must pay interest for the use of someone else’s purchasing power. Anytime your receive credit, you are borrowing funds and going into debt.

Installment Debt One of the most common types of debt Type of loan repaid with equal payments, or installments, over a specific period of time Most people buy durable goods, or manufactured items that last longer than three years on an installment plan.

Trade-off! Longer repayment period=smaller monthly payments The length of the installment period (time to pay the debt) is important in determining the size of the borrower’s monthly payment and the total amount of interest he/she must pay. Longer repayment period=smaller monthly payments Trade-off! The longer it takes to repay an installment loan, the greater the total interest the lender charges!

Mortgages The largest form of installment debt in the United States is the money people owe on mortgages. mortgage: installment debt owed on houses, buildings, or land

Why do people use Credit? People buy items on credit because they believe they require these items immediately. Many people do not want to postpone purchasing an important durable good like a car or truck. They would rather buy on credit and enjoy the use of the item now rather than later. Another reason for going into debt is to spread the payments over the life of the item being purchased.

Deciding to use credit: The decision to borrow or use credit involves whether the satisfaction the borrower gets from the purchases is greater than the interest payments. What? Purchase satisfaction > interest payments Benefit: buy and enjoy the goods or services now Costs: interest payments or lost opportunities to buy other items. Comparing costs and benefits

Checklist for buying on credit: 1. Do I really require this item? Can I postpone purchasing the item until later? 2. If I pay cash, what will I be giving up that I could buy with this money? This is an opportunity cost. 3. If I borrow or use credit, will the satisfaction I get from the item I buy be greater than the interest I must pay? This is also an opportunity cost. 4. Have I done comparison shopping for credit? Look for the best loan or credit deal including the lowest interest rate if not paying cash. 5. Can I afford to borrow or use credit now?

Review: Answer the following on another piece of paper to turn in during class tomorrow. What are the advantages of repaying installment debt over a long period of time? Why do people go into debt? Go to this website and take a reality check. http://www.jumpstart.org/reality-check.html

Sources of Loans and Credit: There are two major types of credit—using credit cards and borrowing money directly from a financial institution. Types of Financial Institutions:

*An important element in money management is choosing the correct financial institution to meet an individual’s needs. Financial institutions are businesses which offer multiple services in banking and finance. *The services customers receive may include savings and checking accounts, loans, investments, and financial counseling. *The benefits consumers gain by using financial institutions includes convenience, cost savings, safety, and security. *It can be in the consumer’s best interest to research financial institutions and to use one institution for all their financial needs. *The advantages to choosing one institution include building a relationship, the simplicity of having all accounts in one place, and possibly lower interest rates on loans. Financial institutions are more willing to offer loans with lower interest rates to loyal customers.

Different types of financial institutions are available. 􀂃Depository institutions offer banking services and loans to individuals and businesses. o Although they can be referred to as banks in general, each is a distinct type of institution. o Depository institutions include: Commercial banks – also known as full-service banks because they offer the wide variety of services and products available including checking and savings accounts, loans, credit cards, investments, and advice; operate under state and federal laws; usually the largest banks; insured by the FDIC. Savings & loan associations (S & Ls) – focus on providing loans and mortgages to customers who hold a savings account; insured by the SAIF; generally pay a higher interest rate than commercial banks; provide interest earning checking accounts.

Credit unions – a non-profit cooperative institution owned by its members; members usually have a common bond; insured by the NCUA; usually charge lower fees and loan rates and offer higher interest rates than commercial banks and S & Ls; many offer free financial counseling; accounts offered include share, share draft, and share certificate accounts. Brokerage firms are licensed institutions which specialize in investing. They offer money management plans to buy and sell stocks, bonds, and other cash investment opportunities through cash management.

What is the definition of a financial institution? What are four types of financial institutions

Regular Charge accounts: Credit extended to a consumer allowing the consumer to buy goods or services from a particular company and to pay for them later Charge accounts may be in the form of a charge account or a credit card. A regular charge account (30-day charge) has a credit limit of $500 or $1000. At the end of the 30 days, the store sends a bill for the full amount. If not paid in full, interest is added. Regular Charge accounts: Credit limit: the maximum amount of goods or services a person or business can buy on the promise to pay in the future.

Revolving Charge Accounts: Allows you to make additional purchases from the same store even if you have not paid the previous month’s bill in full. Usually you must pay 1/5 of the amount. If not paid in full, interest is added. Installment Charge Accounts: Items are purchased and paid for through equal payments spread over a period of time. Part of the amount paid each month is paid to the interest and part is applied to the principal. Major items such as sofas, televisions, and refrigerators are often purchased through an installment charge account.

Credit Cards: Allows a person to make purchases without paying cash The difference: credit cards can be used at many kinds of stores, restaurants, hotels, and other businesses throughout the United States and even foreign countries. Banks issue the cards. These cards may be used to purchase items or they may be used to borrow funds up to a certain limit.

Finance Charges: the cost of credit expressed in dollars and cents The way finance charges are computed is an important factor in determining the cost of credit. Store charge accounts and credit cards use one of four methods to determine how much people will pay for credit. previous balance average daily balance adjusted balance past due balance page 93

Annual Percentage Rates (APR): cost of credit expressed as a yearly percentage (also takes into account things like membership fees) The APR provides a guide that allows consumers to compare costs regardless of the dollar amount of those costs or the length of the credit agreement.

Debit Cards: A debit card does not provide a loan. Debit cards make cashless purchases easier by enabling customers to transfer funds electronically from their bank accounts directly to the store or restaurant where they purchased goods.

Creditworthiness: Credit bureau: private business hired to do a credit check Credit check: investigation of a person’s income, current debts, personal life, and past history of borrowing and repaying debts Credit rating: rating of the risk involved in lending money to a specific person or business

Creditors also look at three other factors that a credit check reveals: capacity to pay your character any collateral you may have

Secured loan: Unsecured loan: When a financial institution makes a loan and asks for collateral The collateral may be the item purchased with the loan money such as a house or a car. It may be something of value the borrower already owns. The lender can claim the collateral if the loan isn’t repaid. Unsecured loan: When a financial institution makes a loan to someone with little or no collateral based on reputation alone. Many times the financial institution will ask for a cosigner for the loan. That person will pay back the loan if the borrower does not.