Earning and Spending: The Consumer

Chapter 5Chapter 5

What determines INCOME?

Wages or SalariesWages or Salaries Payments for labor Payments for labor

servicesservices RentRent

Payment for use of landPayment for use of land InterestInterest

Payment for the use of Payment for the use of capitalcapital

ProfitsProfits Residual payment to Residual payment to

entrepreneursentrepreneurs

SPECIAL NOTE:

Relationship between Relationship between CAPITAL and CAPITAL and LABORLABOR SubstituteSubstitute ComplementComplement

Capital Influences on Labor

Substitute:Substitute: When more capital When more capital

is brought in, less is brought in, less labor is needed. labor is needed.

Worker for a Worker for a robot.robot.

Capital Influences on Labor

ComplementaryComplementary Increases in the use Increases in the use

of capital causes an of capital causes an increase in labor.increase in labor.

Get more Get more computers for computers for LPS – need more LPS – need more techs to techs to maintain.maintain.

ANOTHER Special Note:

Special characteristics Special characteristics of rent and the of rent and the relationship to limited relationship to limited supplysupply

Special characteristics of RENT

Rent is the payment Rent is the payment for a factor that has for a factor that has perfectly inelastic perfectly inelastic supply.supply.

Level of rent depends Level of rent depends ENTIRELY on the ENTIRELY on the demand.demand.

More Types of Elasticity

Perfectly elasticPerfectly elastic Quantity demanded Quantity demanded

changes from zero changes from zero to infinity when to infinity when there is a price there is a price change.change.

More types of Elasticity

Relatively elasticRelatively elastic Refers to the Refers to the

demand condition demand condition in which the in which the percentage change percentage change in quantity is in quantity is GREATER than the GREATER than the percentage change percentage change in price.in price.

Even More Types of Elasticity??

Unitary ElasticityUnitary Elasticity Demand condition Demand condition

where the change in where the change in price is equal to the price is equal to the change in quantity.change in quantity.

Yes! Even more types of elasticity! Relatively Inelastic – Relatively Inelastic –

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

And for a finale …..

Perfectly inelasticPerfectly inelastic Demand condition Demand condition

in which there is no in which there is no change in the change in the quantity demanded quantity demanded when the price when the price changes.changes.

Equation to calculate elasticity

QQ22 – Q – Q11 / Q / Q11

____________________________ PP22 – P – P11 / P / P11

Consumer Sovereignty decides allocation of resources IFIF consumers decide what consumers decide what

goods and services they goods and services they spend their money on.spend their money on.

THENTHEN, it makes it , it makes it profitable for profitable for entrepreneurs to produce entrepreneurs to produce those goods and servicesthose goods and services

ANDAND acquire the acquire the resources to produce resources to produce them.them.

SOSO Consumers decide Consumers decide allocation.allocation.

Consumer “lingo” in Economics

Average Propensity to Average Propensity to ConsumeConsume Percentage after tax income Percentage after tax income

available to spend on goods available to spend on goods and services.and services.

Average Propensity to Average Propensity to SaveSave Percentage after tax Percentage after tax

income available to income available to save.save.

Question to ponder?

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

What country to you think has the highest APC? CHINA!CHINA! Chinese buy more Chinese buy more

televisions and televisions and refrigerators than refrigerators than AmericansAmericans

The number of The number of computers Chinese computers Chinese buy DOUBLES every buy DOUBLES every 28 months28 months

Interested in more about APC and APS? Stay tuned for more Stay tuned for more

details!details!

How can consumers make better choices? InformationInformation AdvertisingAdvertising

Where do we get information?

Product reputationProduct reputation Brand namesBrand names Government standards Government standards

and testingand testing advertisingadvertising

Advertising Types

NoninformativeNoninformative RepetitiveRepetitive DeceptiveDeceptive

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

Why do you make the decisions you do on what to buy? Veblen EffectVeblen Effect

conspicuous conspicuous consumption / status consumption / status seekingseeking

Snob EffectSnob Effect Preference for buying Preference for buying

goes down as # people goes down as # people buying goes up.buying goes up.

Bandwagon EffectBandwagon Effect Joining the crowdJoining the crowd