Topic 2 Consumers and Business Revision

1. Topic 2Consumers and BusinessRevision

2. Students Learn to • Apply economic skills • analyse the impact of changes in consumer income levels on the types of production within the economy • explain the role of firms in solving the economic problem. • Examine economic issues • examine the impact of income on the spending and saving decisions of individuals • assess the extent to which consumer sovereignty is achieved in a variety of markets • investigate the relative significance of the various sources of incomes in Australia • work in groups to investigate the factors leading to change in a particular industry

3. Consumer Sovereignty

4. Consumer Sovereignty Consumer sovereignty refers to how the pattern of consumer spending determines the pattern of production and resource allocation. Businesses respond to consumer demand and produce products that consumers want. Otherwise put, businesses do not produce products that consumers do not want.

5. Consumer Sovereignty A consumer has the choice to either spend or save their income. Therefore, we can say that

6. Consumer Sovereignty • Analysing consumption further we realise there are two types of consumption: autonomous and induced consumption. From this we derive the following formula: • Where C = total consumption • Co = autonomous (unrelated to change in income) consumption • c = the marginal propensity to consume (MPC) • Y = disposable income • The above formula is called the consumption function.

7. Consumer Sovereignty At point X on this graph, income is equal to expenditure. This is called the breakeven point. Notice also that as our income increases, our consumption decreases (our saving increases). X Notice that even when income is at zero, there is still consumer spending. Why or how do we spend with no money?

8. Consumer Sovereignty The MPC shows how a change in income will affect a change in consumption. The yellow highlighted triangle here shows the marginal propensity to consume or the MPC.

9. Consumer Sovereignty • Analysing savings further (remembering ) we can derive the following formula: • Where S = total saving • -Co = autonomous (unrelated to change in income) saving • s = the marginal propensity to save (MPS) • Y = disposable income • The above formula is called the savings function.

10. Factors Influencing Individual Choice

11. Factors Influencing Individual Choice Many factors influence consumer choice: Income Price Price of substitutes Price of complements Preferences/tastes Advertising These many factors include: Mansions and yachts Ferrari or Kia Ipod or Aldi Imports and duty tax Ice-cream or soup Informative and persuasive

12. Sources of Income

13. Source of Income During times of economic prosperity, what might happen to the amount of income in an economy going to wages/salaries? Why is this type of income often called “unearned income”? From what sources is the majority of personal income derived?

14. Definition of a Firm and Industry

15. Firm and Industry • Firms (businesses) produce goods and services to satisfy consumers needs and wants. • Industries are groups of businesses producing a similar range of products or services. • Primary – resource extraction • Secondary – assembly of resources into manufactured goods • Tertiary – firms that sell final goods • Quaternary – knowledge-based services technology services • Quinary – personal services directly to other consumers and businesses such as health, culture and research.

16. Efficiency and the Production Process

17. Efficiency and Production • There are four types of efficiency we focus on in Economics: • Technical – producing at the lowest cost • Allocative – producing the most desirable output • Productive – producing using the least amount of resources • Dynamic – producing using technology and responding to changes in demand

18. Efficiency and Production • Internal economies of scale are related to the shift in average production costs for a business as it boosts its overall product output and the average cost per unit falls until maximum efficiency is attained. • External economies of scale happen outside the control of a company and will result in a reduction in costs and increases in productivity. For example, before the invention of the automobile, the only way to move heavy freight across a land was rail. When heavy freight was eventually transported by large trucks, companies were able to make shipments across large distances to more remote locations.

19. Activities

20. Marginal Propensities For each of the following tables, show how an individual’s consumption or spending changes as their income rises. For each table, you will need to calculate the individual’s: • MPC • MPS • APC • APS

21. Consumption Function What is the breakeven level of income? What is the equation of the consumption function? Explain the relationship between the MPC and the MPS. Discuss two factors that affect the spending and saving decisions of individuals.

22. Law of Diminishing Returns Identify the fixed and variable factors of production from this table. Explain why land is a fixed input in the short-term. At what point are the returns diminished in this example? Construct a graph showing the “diminishing returns curve” based on this information.

23. Economies of Scale What does LRAC mean? Account for the trend in the LRAC. How does a business attain the decrease from Cto C1? Label the technical optimum on the diagram. Describe on internal and one external ways in which a business may attain an economy of scale.