Consumer Behavior & Economic Impact

• Consumers play a key role in the economy through their spending and saving habits.

Consumer Sovereignty

• Consumers ultimately decide what goods and services are produced in an economy, based on their purchasing choices.
• Producers allocate resources to the production of goods with high consumer demand in order to maximize profits.
• Consumer demand and production of luxury goods increase with incomes and decrease during economic downturns.
• Consumer sovereignty leads to increased efficiency in production for firms through technical, allocative, and dynamic efficiencies.
  • Technical efficiency means producing goods at the lowest cost.
  • Allocative efficiency means allocating resources to satisfy consumer preferences.
  • Dynamic efficiency means responding to changing preferences and technology.

Spending and Saving Patterns

• Consumer spending and saving patterns vary with income and age.
• Consumers either spend or save their income.
• As the overall income in the economy rises, so does the level of saving.

Factors Influencing Consumer Choices

• Income is a primary factor in consumer spending.
• Price of goods affects consumer decisions.
• Price of substitute goods influence choices.
• Price of complementary goods affects decisions.
• Consumer preferences and tastes impact decisions.
• Advertising influences consumer choices.

Sources of Income

• Income comes from wages, rent, interest, and profits.
• Social welfare provides income.

Decisions to Spend or Save

• The equation Y = C + S explains that any increased consumption results in a decrease in saving.
• Changes in disposable income lead to changes in levels of saving and consumption.
• APC (Average Propensity to Consume) is C/Y, the proportion of income spent on consumption.
• APS (Average Propensity to Save) is S/Y, the proportion of income that is saved.
• As income rises, people save a higher proportion of their income (APS > APC).
• Consumers on lower incomes spend more of their disposable income.
• At low income levels, consumers can have positive consumption financed by credit and savings.

Consumption Function

• Economists analyze consumer behavior using MPC (Marginal Propensity to Consume) and MPS (Marginal Propensity to Save).
  • MPC represents the proportion of each extra dollar that goes to consumption; it is the slope of the consumption function.
  • MPS represents the proportion of each extra dollar saved.
• The sum of MPS and MPC equals one (MPC + MPS = 1).
• Consumption spending is expressed as autonomous consumption (unrelated to income changes) and induced consumption (related to income changes).
• The consumption function is expressed as C = Co + cY, where:
  • C = Total consumption
  • Co = Autonomous consumption
  • c = Marginal Propensity to Consume
  • Y = Income

Life-Cycle Theory of Consumption

• Over a lifetime, consumption and savings behavior changes.
• Younger individuals have lower incomes, spend more, and dis-save or borrow.
• Middle-aged individuals experience rising incomes and save more to pay off debts and accumulate retirement assets.
• Individuals of pension age rely on past savings or pensions for income.
• Individuals with higher incomes are likely to have a lower APC due to these life-cycle changes.

Business Role

• A firm uses entrepreneurial skills and factors of production to produce goods or services for sale.
• Firms are primary production units whose size, behavior, and performance affect productivity.
• An industry consists of firms making similar, competing items.

Production Decisions: What, How Much, How

• Firms must decide what to produce considering consumer demand, skills, and potential business opportunities.
• When deciding how much to produce, businesses consider consumer demand, production capabilities, competition, and market trends.
• A firm's decision on how to produce depends on efficiently using factors of production.

Impact of business in the Economy

• Business contributes to in Economy through Growth, Reduce the incidence of unemployment, Regional development and Increase productive capacity.

Goals of the Firm

• Maximizing profits through efficient resource use and pricing is a central goal for firms.
• Meetings shareholder expectations by potentially balancing short-term success with long term values.
• Increase market share: Increasing sales to gain revenue.
• Maximizing growth of firm's assets to ensure bigger asset base.
• Satisficing behaviour: Pursuing a satisfactory target.

Efficiency and the Production Process

• Firms aim to deliver goods at a minimum cost to increase productivity.
• Productivity is the quantity of goods and services an economy can produce with a given amount of inputs.
• Productivity must increase proportionally more than resource inputs to improve.

Types of Productivity

• Productivity is the volume of output produced relative to the volume of inputs used: Outputs/inputs.
• Multifactor Productivity (MFP) measures the productivity of all combined production factors: Output/all inputs.
• Single Factor Productivity (SFP) measures the productivity of each production factor like labor: Output/Single input.
• Increased productivity improves living standards by reducing waste, lowering costs, decreasing inflation, and increasing international competitiveness.

Specialization and Economies of Scale

• Firms specialize in producing goods with a comparative advantage to increase productivity.
• Increases in productivity happen through the use of labour, natural services, and capital.
• Firms achieve internal economies of scale by reducing per-unit costs as output increases.
• Internal diseconomies of scale arises when a firm growing becomes a disadvantage.

LRAC: Long-Run Average Cost Curve

• LRAC shows the relationship between production costs and internal economies and diseconomies of scale.
• Point Q on the LRAC signifies the technical optimum and most efficient production level.
• As production increases to point Q, firms can increase output and reduce spending.
• Past Point Q, firms begin to experience increasing costs.
• The LRAC can shift downwards:
  • Increase efficiency.
  • Decrease costs per unit.
• External economies of scale are advantages due to the expansion of an industry; external diseconomies are disadvantages faced by a firm.
  • Other costs advantages and disadvantages affect the business outside of its control.

Law of Dimishing Returns

• The law of diminishing returns states that an increase in one factor of production and all other constant factors(ceteris paribus), eventually total output will diminish.
• The Average Physical Product (APP) is total output from each unit of input, expressed as total output/total inputs.
• The Marginal Physical Product is the amount can increase from one unit change in an input assuming no change from the quantities of inputs.

Impact of investment, tech, ethics :

• Investment, tech and ethics affects the production methods, prices, employment, output, profits, types of products, globalisation and environmental sustainability
• Rapidly change environment and markets require a responsibility for environment and society.
• Investment, technology and ethical conduct affects competitiveness to improve production and reduce prices.

Factors Influencing Consumer Choice (Textbook Notes):

• Disposable after-tax income is the main determinant of consumer spending.
• Increases in disposable income lead to increased consumer spending.
• With their rise in income, comes the option to save more.
• Relative prices influence decisions.
• Consumer react by buying less goods and services with a rise in price,
• Complements: A will impact demand for B.
• Consumer tastes and preferences may be influenced by a changes in the weather, fashion, education, social or peer pressure and mass media and online advertising.
• Advertising increases product consumption. Informative advertising conveys consumer information, brand loyalty is built, by the persuasion of the product.

Sources of Income (Textbook Notes):

• Income comes from wages and salaries.
• Non-wage: Individuals owning businesses -> share profit, dividends. Also, rent from owing real property.
• Rates go up as salary rises and low unemployement.
• Returns tend to happen in periods of economic activity -> vice versa.
• Personal income are things such factors such as production, and the amount earned for it.
• Main: Salary + wages from the contribution of labour.
• Taxation revenue -> transfer payments for people who sick, old, disabled.
• Pensions for sick,disabled,etc and family allowances to who have dependent children, unemployment benefits.

Review:

• Earned is paid to employees, who work. Unearned is any that is earned passively without actually doing work.
• Main source for Australia, is 55.3% in the graph.
• Unearned include owning buisness (profits) and dividends
• A government provides these for people whom unemployed, sick, disabled, sick,etc.
• A firm produces any business goods to satisfy customers and needs, for profit.