The Engine That Runs the Economy CHAPTER 1 – CONSUMERS

 Businesses cannot succeed without customers  As a consumer, you have the power to choose what and where to buy products and services  Businesses spend a lot of time and money researching what customers want  A good place for businesses to start is by looking at customer values  Values – your principles – the standards by which you live  Values 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 life  They come from your values, your needs & wants, and your hopes and dreams  Needs – things you cannot live without  Wants – the things that you would like to have but can live without  Long-term goals – goals you want to achieve over a period of years during your life span  Life span – the time from your birth to death  Life-span goals – the most important long-term goals you hope to reach during your life span  Life-span plan – a strategy people create to help them achieve their life-span goals  Short-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 system  Economic system – the way a nation uses resources to produce goods and services  Production – the creation of goods and services  Resources – 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 next  Usually found in tribes in remote areas of the world 2. Command Economy –  The government owns most resources and makes most economic decisions  Government decides prices, colors, styles, and amounts produced  Individuals have no say in production or even what your job will be  Cuba & 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 scarcity  Scarcity – 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 down  As price goes down, quantity demanded goes up DEMAND PricePrice Quantity Demanded D1D1

 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 up  As 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 manufacturers  Manufacturers 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 costs 2.Change prices 3.Increase quantity of products sold THE PROFIT MOTIVE

 Consumer – anyone who buys or uses products  Consumer 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 consumers  Businesses 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 buy 2.Sell products at a price consumers are willing to pay 3.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 name  Often used when introducing new products  Uses jingles and slogans  Effective 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 benefits  Often used for complex or highly technical products that consumers may not understand  Provides 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 product  Goal 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 companies  The 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 buy  Focus 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 statements  The 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 deceptive  Puffery – innocent exaggerations used to sell products  These exaggerations are perfectly legal  Ex. “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 resources  Society limits your freedom of choice  The government usually sets regulations on these limits  You 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 all  Some people try to reduce the amounts of natural resources they use  Others try to use as many as they are able to buy  Global warming – the gradual increase in the earth’s average temperature USING NATURAL RESOURCES

 Hybrid cars  Reduce water usage & don’t pollute it  Recycling paper products and reducing usage  Reducing garbage created  Buying from socially responsible companies (“green” companies)  Follow rules and regulations for disposing of waste WAYS CONSUMERS CAN REDUCE NATURAL RESOURCES