1. Chapter 3 Your Purchasing Power

2. What Is Inflation?
Inflation is an increase in prices for goods and services.
Flood or hurricane can wipe out crops sending prices up.
Consumer Price Index (CPI) measures price changes over time.
Tool used by the US government to measure inflation
3-1 Inflation and the Value of Money
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3. What Is Inflation?
As inflation rises, the purchasing power of the dollar falls.
You must earn more to have the same standard of living.
COLA: Cost of Living Adjustments
Given by employers to keep pace with inflation
3-1 Inflation and the Value of Money
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4. What Are the Types of Inflation?
Disinflation occurs when the rate of rising prices slows down.
Example: In spring and summer, the price of swimsuits may be high and rising. In the fall and winter, however, if the price is rising, it is at a much slower rate.
Reflation occurs when high prices are followed by lower prices and then high prices again.
Example: When gas prices surge, people don’t buy as many big cars and trucks. When the gas prices fall they begin buying large trucks again.
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3-1 Inflation and the Value of Money

5. What Are the Types of Inflation?
Hyperinflation is rapidly rising prices that are out of control.
Considered to be inflation at 50 percent or higher
Example: Following World War I, Germany’s monthly inflation reached over 300 percent.
Deflation is a decrease in prices.
Example: a computer uses a new, faster processor may sell at a high price when it first comes out on the market. However, prices lower because newer, faster computers are released
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3-1 Inflation and the Value of Money

6. What Are Causes and Effects of Inflation?
Demand-pull Inflation: Consumers want to buy more goods and services than producers supply. Businesses raise prices to balance supply with demand.
“Too many dollars chasing too few goods”
Cost-push Inflation: producers raise prices because their costs to create products are rising.
When wages go up, the cost of producing the product goes up. Producers then put the burden on the consumer and raise prices.
Affected by productivity which is the measure of efficiency with which goods and services are made.
3-1 Inflation and the Value of Money
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7. What Are Causes and Effects of Inflation?
Real-cost inflation: As resources become scarce or more difficult to get, prices rise in the form of real-cost inflation.
When there is less natural gas, the cost of providing natural gas rises.
Effects
Higher employment rates
Economist think that rising prices signal increased demand. Increased demand prompts the employer to hire more people thus lowering the unemployment rate.
3-1 Inflation and the Value of Money
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8. What Are Causes and Effects of Inflation?
Less spending: Rising prices cause people to either buy less because the dollar does not go as far.
Less saving: Consumers can also save less or take money from their savings to continue spending at the same level.
3-1 Inflation and the Value of Money
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9. Time Value of Money
Dollar you receive in the future will be worth less than a dollar you receive today.
Example: You loan a friend $20 today. Your friend promises to pay you back in one year. The money you receive in one year will not have the same value as the money you loaned your friend. Prices have risen higher and the $20 will not buy as many goods and services.

10. Focus On . . . Fighting Inflation
Monetary policy refers to the actions by the Fed to stabilize the economy.
Fed controls the discount rate, federal funds rate, and prime rate.
Fiscal policy refers to the actions by the federal government to manage the economy.
Government raises/lowers taxes.
3-1 Inflation and the Value of Money
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11. How Are Prices Set in a Market Economy?
Cost-recovery pricing is used to recover R&D costs.
When the product is first introduced the prices are high due to R&D to develop the product.
Cost-plus pricing is calculated using production costs plus a markup.
Markup is the profit margin.
Example: $20 to produce. Marked up 50%. Sold for $30.
3-2 Prices and Consumer Choices
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12. How Are Prices Set in a Market Economy?
Value-based pricing is based on what consumers are willing to pay.
Market-based pricing is set to be competitive with similar products.
3-2 Prices and Consumer Choices
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13. How Do Buying Strategies Affect Prices?
Rational buying: Selecting goods and services based on need, want, and logical choices
Economizing is saving money and spending only when necessary.
Waiting until it is necessary to buy a product
Optimizing is getting the highest value for money spent.
Purchasing in large quantities
3-2 Prices and Consumer Choices
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14. How Do Buying Strategies Affect Prices?
Emotional buying: Purchasing products based on desire rather than logic.
Impulse buying: Buying something on the spur of the moment without thinking it through or planning the purchase.
3-2 Prices and Consumer Choices
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15. What Are Selling Strategies?
Meeting demand
Convenience
Easy location, safe place, etc.
Customer service
Warm friendly people, return policy, etc.
3-3 Getting More for Your Money
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16. What Are Selling Strategies?
Meeting demand
The right product and price
Examples: meet basic needs, offer brand names, use discount pricing
3-3 Getting More for Your Money
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17. What Are Selling Strategies?
Meeting demand
Branding strategy: Carry certain brands in order to attract customers who are loyal to those brands
Discount Pricing: A business offers the lowest everyday price possible. May need to sell slightly lower quality in order to offer the lowest prices.
3-3 Getting More for Your Money
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18. What Are Selling Strategies?
Creating demand
Advertising is informing consumers about products and encouraging them to buy.
Advertising sources: newspapers, magazines, TV, radio, Internet, billboards, signs, direct sales
The target audience is a specific group of people who are likely to buy.
3-3 Getting More for Your Money
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19. What Are Selling Strategies?
Creating demand
Internet advertising uses banner ads and pop up ads to draw consumers attention to their products or web pages.
Direct Advertising: Directly giving consumers information about a product.
Samples, Coupons, etc.
3-3 Getting More for Your Money
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20. What Are Consumer Buying Strategies?
Prepare a shopping list.
Do not let a salesperson influence you.
Stick to your list and avoid impulse buying.
Shop when you are most alert.
Comparison shop among several sellers.
Keep receipts, warranties, and packaging.
3-3 Getting More for Your Money
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21. What Are Consumer Rights?
Many laws protect consumers.
Consumer Bill of Rights
Airline Passenger Rights
Consumer Technology Bill of Rights
Patients’ Bill of Rights
Consumer Protection Laws
Examples: Food, Drug, and Cosmetic Act; Hazardous Substances Act; Cigarette Labeling and Advertising Act; Nutrition Labeling and Education Act; FERPA; HIPAA
3-4 Consumer Rights and Responsibilities
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22. Sources of Consumer Protection
Federal agencies
Examples: USDA, FDA, CPSC, FCC, FTC, FAA, SEC
Food and Drug Administration: Enforces laws that prevents or stops the selling of mislabeled foods, drugs, cosmetics, and medical devices.
Federal Trade Commission: Restricts unfair methods of competition, false or deceptive advertising, inaccurate information on credit reports, and concealment of true costs of credit.

23. Sources of Consumer Protection
State and local assistance
Consumer protection agency or attorney generals office.
Private Organizations
Examples: BBB, National Consumers League, Consumers Union
3-4 Consumer Rights and Responsibilities
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24. How Are Consumers Defrauded?
Deception involves false or misleading claims made about a product.
Bait and switch: illegal sale techniques in which a business advertises a bargain product with the intent of persuading consumers to buy a more expensive product.
Fake sales: Business advertises a big sale but keeps items at regular price.
3-4 Consumer Rights and Responsibilities
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25. How Are Consumers Defrauded?
Deception involves false or misleading claims made about a product.
Low-balling: advertising a basic service at an unusually low price to lure in customers and then telling them that they need additional repairs or services.
Pyramid schemes: illegal multilevel marketing gimmick that promises people high commissions on their own sales as wells as on the sales of other people they recruit.

26. How Are Consumers Defrauded?
Ponzi schemes: Fraudulent investment operation in which money collected from new investors is used to pay off earlier investors
Pigeon drop: con artist convinces a person to give up his or her money in return for a share of a larger sum of money.
Infomercials: TV ad with testimonials, demonstrations, and introductory prices.
3-4 Consumer Rights and Responsibilities
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27. How Can Consumers Protect Themselves from Fraud?
Shop smart
Be aware of prices
Understand sale terminology
Compute unit prices
Read labels
Check packages carefully
Read contracts
Keep receipts and warranties
Compute total cost
Research businesses
3-4 Consumer Rights and Responsibilities
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