Transcript 3-1 Inflation and Prices

Chapter 3
Income and Purchasing Power
Copyright 2007 Thomson South-Western
Inflation
• Is an increase in the general level of
prices for goods and services
• Is measured by the U.S. government
using the Consumer Price Index (CPI)
• The CPI measures the change in a
list of goods and services that are
commonly bought by consumers
3-1 Inflation and Prices
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Types of Inflation
• Disinflation – occurs when prices are
rising, but at a slow rate. Happens
when demand for the product is not the
same throughout the year.
• Reflation – occurs when prices are
high but then drop due to lower
demand. Example—large vehicle when
gas prices are high.
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Type of Inflation
• Hyperinflation – occurs when prices
are rising so rapidly they are out of
control. (Usually an inflation rate of 50
percent or higher).
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Deflation
• Is a decrease in the general level of
prices for goods and services
• Is the opposite of inflation
• Happens when
– Events cause consumers to buy less
– Producers are able and willing to provide
goods at lower prices
3-1 Inflation and Prices
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Causes of Inflation
• Demand-pull inflation
• Cost-push inflation
• Real-cost inflation
Demand-pull inflation occurs
when consumers want to buy
more goods than producers
supply.
3-1 Inflation and Prices
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Causes of Inflation
• Demand-pull inflation – when
consumers want to buy more goods
and services than producers supply.
• Cost-push inflation – when producers
raise prices because their costs to
create products are rising.
• Real-cost inflation – when prices rise
because resources diminish or become
hard to get.
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In Times of Inflation
• Mild inflation of 2 or 3 percent can be good for
the economy
• Workers with fixed pay rates may be able to
buy less
• Consumers must spend more to meet needs
and may be able to save or invest less
• Times value of money is a dollar received in
the future is worth less than a dollar received
today
3-1 Inflation and Prices
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Check In #1
1.What is inflation and how is inflation
measured?
2.How does disinflation, reflation and
hyperinflation differ?
3.What is deflation?
4.How does demand-pull inflation differ from
cost-push inflation?
5.How does inflation affect spending, saving,
and investing decisions?
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Ethics
A Full Day’s Work for a Full Day’s Pay
• Ethical behavior requires workers to
provide a full day’s work for a full day’s pay
• This behavior can lead to positive job
ratings or promotions
• Poor work habits can lead to poor job
ratings or dismissal
3-1 Inflation and Prices
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The Federal Reserve System
• Two tools used to manage the effects of
rising prices
• Monetary policy is the actions by the
Federal Reserve System (the Fed).
– Discount rate is rate the banks have to pay to
borrow money from the Fed.
– Federal funds rate is the rate the banks can
borrow from the excess reserves of other banks
– Prime rate is the rate banks charge to the most
creditworthy customers.
3-1 Inflation and Prices
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The Federal Reserve System
Fiscal policy refers to actions taken by the
federal government to manage the
economy.
Source: The Federal Reserve Board, Monetary Policy,
http://www.federalreserve.gov/policy.htm (accessed October 17,
2006).
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Setting Prices
• Prices are affected by
– Producers
– Consumers
– Market forces
• Sellers want to set a price
– That will support the greatest demand
– That will be profitable
3-2 Price and Demand
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Cost-Plus Pricing
• Price is set by considering
– The total cost of making and delivering the
product
Cost-Plus Pricing for a Chair
– A markup amount
Wood
$23.76
(also call profit
Labor
20.00
margin)
Paint and supplies
1.24
Indirect costs
Total cost
Markup (40%)
Price
3-2 Price and Demand
12.00
57.00
22.80
$79.80
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Value-Based Pricing
• Price is set by considering how much
consumers will be willing to pay
• Companies often do
market research to help
in setting prices
A mall offers many stores at which
to stop for the best prices.
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Market-Based Pricing
• Price is set to be competitive with prices of
similar products
• Companies may set a higher price for
products with new features
• Unique products that cannot be bought
elsewhere may command higher prices
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Buying Strategies Affect Demand
• Economizing
– Saving as much as possible
– Spending money only when necessary
• Optimizing
– Getting the highest value
for the money spent
Taking advantage of sale prices
is an example of optimizing.
3-2 Price and Demand
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Success Skills
Time Management
• Using time management strategies can help
you be more productive
• Scheduling time to plan
purchases can help you make
better buying decisions
This shopper is economizing
and following a shopping list.
3-2 Price and Demand
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Selling Goods and Services
• Sellers use various strategies
–
–
–
–
Convenience
Customer service
Meeting needs and wants
Creating demand
through advertising
PR Newswire HOLTON, TEITELMAN AND GURY ADVERTISING
3-3 Selling and Buying Strategies
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Buying Strategies
• Before you shop
– Prepare a list of needed items
– Decide how much to spend
• While you shop
– Compare prices
– Do not make last-minute purchase decisions
• After you buy
– Keep receipts and warranties
– Inspect the product and evaluate the purchase
3-3 Selling and Buying Strategies
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Check In #2
1.How are prices set when using the cost-plus pricing
strategy?
2.How is a market-based pricing strategy different from
a value based pricing strategy?
3.What is economizing and how does using this buying
strategy affect demand and prices in a market
economy?
4.What is optimizing and how does using this buying
strategy affect demand and prices in a market
economy?
5.How can using effective time management strategies
lead to better buying decisions?
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