Transcript Earning and Spending: The Consumer

Earning and Spending: The
Consumer
Chapter 5
What determines INCOME?
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Wages or Salaries
 Payments for labor
services
Rent
 Payment for use of
land
Interest
 Payment for the use of
capital
Profits
 Residual payment to
entrepreneurs
SPECIAL NOTE:
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Relationship between
CAPITAL and
LABOR
 Substitute
 Complement
Capital Influences on Labor
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Substitute:
 When more capital
is brought in, less
labor is needed.
 Worker for a
robot.
Capital Influences on Labor
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Complementary
 Increases in the use
of capital causes an
increase in labor.
 Get more
computers for
LPS – need more
techs to
maintain.
ANOTHER Special Note:
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Special characteristics
of rent and the
relationship to limited
supply
Special characteristics of RENT
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Rent is the payment
for a factor that has
perfectly inelastic
supply.
Level of rent depends
ENTIRELY on the
demand.
More Types of Elasticity
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Perfectly elastic
 Quantity demanded
changes from zero
to infinity when
there is a price
change.
More types of Elasticity
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Relatively elastic
 Refers to the
demand condition
in which the
percentage change
in quantity is
GREATER than the
percentage change
in price.
Even More Types of Elasticity??
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Unitary Elasticity
 Demand condition
where the change in
price is equal to the
change in quantity.
Yes! Even more types of
elasticity!
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Relatively Inelastic –
 Demand condition
where the
percentage change
in quantity is
SMALLER than the
percentage change
in price.
And for a finale …..
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Perfectly inelastic
 Demand condition
in which there is no
change in the
quantity demanded
when the price
changes.
Equation to calculate elasticity
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Q2 – Q1 / Q1
______________
P2 – P1 / P1
Consumer Sovereignty decides
allocation of resources
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IF consumers decide what
goods and services they
spend their money on.
THEN, it makes it
profitable for
entrepreneurs to produce
those goods and services
AND acquire the
resources to produce them.
SO Consumers decide
allocation.
Consumer “lingo” in Economics
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Average Propensity to
Consume
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Percentage after tax income
available to spend on goods
and services.
Average Propensity to
Save
 Percentage after tax
income available to
save.
Question to ponder?
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Why is it important to
know the APC and
APS for people?
What country to you think has
the highest APC?
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CHINA!
Chinese buy more
televisions and
refrigerators than
Americans
The number of
computers Chinese
buy DOUBLES every
28 months
Interested in more about APC and
APS?
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Stay tuned for more
details!
How can consumers make better
choices?
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Information
Advertising
Where do we get information?
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Product reputation
Brand names
Government standards
and testing
advertising
Advertising Types
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Noninformative
Repetitive
Deceptive
Can reduce consumer
utility by raising the prices
of goods and services and
by distorting decision
making.
Why do you make the decisions
you do on what to buy?
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Veblen Effect
 conspicuous
consumption / status
seeking
Snob Effect
 Preference for buying
goes down as # people
buying goes up.
Bandwagon Effect
 Joining the crowd