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3
Consumers in the
Economy: An Overview
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Chapter Objectives
• Relate your consumer economic activities to
your financial well-being and to the state of
the overall economy.
• Explain how economic conditions affect job
opportunities and standard of living.
• Summarize how consumer spending
influences overall economic conditions in a
market economy.
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continued
Chapter Objectives
• Describe the impact of consumer and
government borrowing on the economy.
• Give examples of ways consumer economic
problems arise from market characteristics.
• Outline consumer economic problems that
result from consumer mistakes.
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Economic Activities of
Consumers
• Economic activities of consumers
include
–
–
–
–
earning
spending
saving
borrowing
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– insuring
– investing
– paying taxes
Earning Your Way
• You can choose
– the field in which
you work
– your level of
education
– how much
training you
attain
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Earning Your Way
• Ability to find work depends on your
–
–
–
–
–
job skills
experience
education
career choice
demand for workers in your chosen field
• Ability to stay employed and advance
depends on your job performance
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continued
Earning Your Way
• Your earning power and job
performance determine your personal
standard of living
• A higher standard of living means a
higher quality of life for most people
• Your standard of living and income
should rise as you advance on the job
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Earnings and the Economy
• Earning activities of consumers
contribute to a country’s wealth
• The national standard of living is the
level of prosperity in the country
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continued
Earnings and the Economy
• The U.S. has one
of the highest
standards of
living in the
world
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continued
Earnings and the Economy
• Measures of a nation’s prosperity
– GDP per capita—the national GDP
divided by the population of a country
– Labor productivity
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GDP Per Capita
• High or rising GDP
per capita means
– incomes are high or
rising
– more goods and
services are available
to each person
– people are consuming
more
– standards of living are
high or rising
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continued
GDP Per Capita
• Low or falling GDP per capita means
– incomes are low or falling
– fewer goods and services are available to
each person
– people are consuming less
– standards of living are low or falling
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continued
GDP Per Capita
• There are problems with using GDP per
capita as a measure of national
prosperity
– It assumes everyone gets an equal share of
goods and services produced
– It disregards unpaid work, such as
housework, child care, and volunteer work
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Labor Productivity
• High labor productivity indicates a
healthy economy
• Productive workers produce more and
can increase their earnings
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continued
Labor Productivity
• To raise labor productivity, businesses
and governments invest in
– capital, such as factories and machinery
– research and technology
– transportation, communication, and
energy
– education and training of the workforce
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continued
Labor Productivity
• By raising the productivity of its
workforce, a nation can raise its GDP
and create wealth
• State of the economy determines job
opportunities and earnings of workers
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Spending and the Economy
• Consumers in a market economy make
their own spending choices
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continued
Spending and the Economy
• Spending decisions of consumers
create demand for goods and services
they buy
• As a group, consumers determine the
success or failure of specific goods,
services, and businesses
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continued
Spending and the Economy
• Optimistic consumers tend to spend
and borrow more, which creates
– greater demand for goods and services
– growth of businesses to meet increased
demand
– more jobs
– a sense of prosperity
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continued
Spending and the Economy
• Pessimistic consumers tend to spend
and borrow less, which
–
–
–
–
lowers demand for goods and services
lowers sales and slows business growth
makes jobs harder to find
can lead to a recession
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Saving Your Money
• Savings is
anything that
improves a
person’s financial
position
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continued
Saving Your Money
• Savings include
–
–
–
–
–
cash
investments
home improvements
cash value of insurance policies
durable goods
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Saving and the Economy
• Savings are put into financial
institutions
• Financial institutions loan money to
businesses and other consumers
• Loans pay for business growth,
building construction, home
purchases, and more
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Borrowing to Spend
• Consumer credit lets you buy now and
pay later
• Credit helps consumers pay for major
and unexpected purchases
• Credit is costly; use of credit reduces
future income
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Borrowing and the Economy
• Borrowing
increases money
in circulation
and demand for
goods and
services
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continued
Borrowing and the Economy
• Borrowing can
– cause prices to rise, resulting in inflation
– decrease future demand
– threaten long-term economic prosperity
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In Your Opinion
• Does using credit do
more harm than good
to the economy? to
individuals?
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Insuring Against Financial Risks
• Insurance is a risk-management tool
• Policyholders join others in insurance
pools and make payments to insurance
companies
• Insurance companies invest payments
in business enterprises
• Payments and their earnings pay the
bills of policyholders who suffer losses
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Insurance and the Economy
• Insurance contributes to overall
economic stability by
– spreading financial risks
– stabilizing incomes of people who suffer
serious financial losses
• Insurance company investments
contribute to growth
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Investing for the Future
• An investment is an asset that increases
wealth over time
• Investments also carry risk of loss
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Investing for the Future
• Types of investments include
–
–
–
–
–
securities (stocks, bonds, mutual funds)
real estate
business ownership
certain insurance policies
valuable items
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Investment and the Economy
• Investments pay for
– business growth and activity
– research and development of new
technology
– marketing of new products and services
• Benefits of investments ripple through
the economy
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Paying Taxes for Government
Services
• Tax revenues pay for goods and
services that government provides
• Voters indirectly decide the level of
taxes and what they want to “buy”
from government
• Types of taxes include income tax,
sales tax, property tax
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Taxes, Government Spending,
and the Economy
• Positives of
government
spending
– It creates demand
for goods and
services
– It stimulates the
economy
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continued
Taxes, Government Spending,
and the Economy
• Negatives of government spending:
– It can drive up prices and cause inflation
– It can drive up the national debt (deficit
spending)
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Economic Problems of
Consumers in a Market Economy
• A confusing variety of products
• Some questionable selling methods
• Conflict of interest between consumers
and sellers
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Confusing Variety of Products
• The marketplace contains many sellers
• There are many new products and
services created each day
• Consumers have many options and
choices to make
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Questionable Selling Methods
• High-pressure
selling
• False advertising
• Contests
• “Free” offers
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Conflict of Interest
• Sellers want to charge the highest price
they can get
• Consumers want the best quality at the
lowest price
• Forces of supply and demand balance
the needs of sellers and consumers
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Consumer Mistakes Leading to
Problems
• Lack of planning
• Failure to use information
• Impulse buying and overspending
• Poor communication
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Lack of Planning
• When consumers fail to plan, it can be
– difficult to pay bills
– hard to save for big expenses and future
needs
– difficult to use credit wisely
– easy to buy things that do not fulfill your
needs and goals
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Failure to Use Information
• Consumers
sometimes fail to
investigate, ask
questions, and
know exactly
what they are
buying
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continued
Failure to Use Information
• Failure to use information can be
costly, disappointing, and even
dangerous
• Information sources include
salespeople, the Internet, and
consumer magazines
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Impulse Buying and
Overspending
• Consumers sometimes buy without
thinking about needs, goals, and
consequences
• Impulse buying can result in
overspending and thoughtless
spending, especially among credit card
users
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Poor Communication
• Includes the failure to complain when
necessary
• Can be costly
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Central Ideas of the Chapter
• The economic decisions of consumers impact
the overall economy.
• Smart consumers avoid the pitfalls that a
market economy can create.
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Glossary of Key Terms
Back
• asset. An item of value that a person owns,
such as cash, stocks, bonds, real estate, and
personal possessions.
• durable goods. Products that have lasting
value, such as furniture, appliances, and
cars.
• GDP per capita. The market value of final
goods and services produced per person.
• income tax. A tax on the earnings of
individuals and corporations.
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Glossary of Key Terms
Back
• investment. An asset bought to increase
wealth over time, but that carries the risk of
loss.
• labor productivity. The value of the goods
and services a worker creates in a given
time.
• property tax. Tax paid on real estate owned
by individuals and corporations.
• prosperity. A time period of growth and
financial well-being.
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Glossary of Key Terms
• sales tax. Tax added to the price of goods
and services you buy.
• standard of living. The overall level of
comfort of a person, household, or
population as measured by the amount of
goods and services consumed
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