Transcript 3-1 Inflation and the Value of Money

Chapter 3
Your Purchasing Power
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
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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
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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 are high, 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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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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What Are Causes and Effects of
Inflation?
Causes
• 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.
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What Are Causes and Effects of
Inflation?
Causes
•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.
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What Are Causes and Effects of
Inflation?
Effects
• 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.
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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.
Focus On . . .
Fighting Inflation
• Monetary policy refers to the actions by the
Fed to stabilize the economy.
o 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.
o Government raises/lowers taxes.
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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.
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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.
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How Do Buying Strategies Affect
Prices?
• Rational buying: Selecting goods and
services based on need, want, and logical
choices
o Economizing is saving money and
spending only when necessary.
oWaiting until it is necessary to buy a
product
o Optimizing is getting the highest value
for money spent.
oPurchasing in large quantities
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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.
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What Are Selling Strategies?
Meeting demand
• Convenience
• Easy location, safe
place, etc.
• Customer service
• Warm friendly
people, return
policy, etc.
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What Are Selling Strategies?
Meeting demand
• The right product and
price
o Examples: meet
basic needs, offer
brand names, use
discount pricing
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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.
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What Are Selling Strategies?
Creating demand
• Advertising is informing consumers about
products and encouraging them to buy.
o 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.
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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.
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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.
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What Are Consumer Rights?
Many laws protect consumers.
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Consumer Bill of Rights
Airline Passenger Rights
Consumer Technology Bill of Rights
Patients’ Bill of Rights
Consumer Protection Laws
o Examples: Food, Drug, and Cosmetic Act;
Hazardous Substances Act; Cigarette Labeling
and Advertising Act; Nutrition Labeling and
Education Act; FERPA; HIPAA
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Sources of Consumer Protection
• Federal agencies
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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.
Sources of Consumer Protection
• State and local
assistance
•
Consumer protection
agency or attorney
generals office.
• Private Organizations
o Examples: BBB, National
Consumers League,
Consumers Union
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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.
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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.
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.
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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
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