Consumers and Business

The role of consumers in the economy

Consumer Sovereignty

Consumers are all individuals in the economy who consume goods and services to satisfy their needs

Consumer Sovereignty refers to the fact that the pattern of consumer spending determines the pattern of production

High demand Prices rise Producers notice higher profits Produce more of those goods

How businesses reduce consumer sovereignty?

Marketing
o Most aim to manipulate behaviour of consumers by researching consumer tastes and preferences
o Use information to market to consumers and manipulate them into purchasing their goods
Misleading or deceptive conduct
o False or dishonest claims about a product
o Convinces consumers into purchasing something they dont actually want to buy
Planned Obsolescence
o Producing goods that wear out quickly or go out of date
o Encourages consumers to make further purchases
o E.g. Car companies release new designs each year so people buy new cars so theyre not driving something
that is out of date
Anti-competitive behaviour
o Firms in small markets without competitors can diminish consumers ability to choose what they want to
buy
o E.g. Companies with no competitors can provide poor customer assistance because they have no other
options

Patterns of spending and saving/dissaving

Y=C+S

Y = Disposable (after tax) income

C= Consumption expenditure

S = Savings

= =

APC = Average propensity to consume (The proportion of income that is spent on consumption)

APS = Average propensity to save (The proportion of income that is saved)

Change in consumption
=
Change in income
Change in savings
=
Change in income

MPC + MPS = 1

MPC = Marginal propensity to consume (Proportion of each extra dollar of income that is consumed)

MPS = Marginal propensity to save (Proportion of each extra dollar of income that is saved)
Major factors that influence spending or saving
Cultural factors
Personality factors
Confidence and future expectations
Any specific future spending plans
Tax Policies
Availability of credit

Incomes impact on saving and consumption

As income rises, people tend to save a higher proportion of income (APC &
APS )
People on lower incomes spend more of their disposable income that higher
income earners
As income rise, less money is spent on essentials
As income rises, consumption does to (as seen in consumption function)
There tends to always be some positive level of consumption
o Through credit or savings for lower income earners
Concept applies to whole economy i.e. As national incomes rises, overall savings rises faster

Ages impact on saving and consumption

Simple consumption theory is that households spends and save same
proportion of income over each period
Younger people save very little, receive little income and need to spend most
on education through dissaving (loans etc.)
When working people save more money for retirement
In retirement, people consume out of past wealth or pensions
People on higher incomes save more to pay past debts and accumulate assets for retirement

Factors influencing consumer choice

Level of income
o Higher income earners tend to buy more items and higher quality items
o Lower income earners tend to buy less luxury items
Price of good or service itself
o Necessities will be purchased regardless of price e.g. basic food
o Price rises in more luxurious items will reduce demand e.g. lobsters
Price of substitute and complement goods
o If price of substitute good , more people are likely to buy other substitute good and vice versa
o If price of complement good , more people are likely to buy the compliment good and vice versa
Consumer tastes and preferences
o Consumers choose to purchase goods that give highest utility or satisfaction
o Some goods can reduce utility e.g. Someone who dislikes classical music goes to watch symphony
o As consumers tastes and preferences so do demand for goods e.g. fashion trends
o Technological process and innovation leads to consumers demanding new and better products e.g. Mp3
players vs compact disks
Advertising
o Multiple avenues e.g. Pop-up ads, telemarketing, SMS advertising, billboards
o Can build consumer loyalty which makes demand less responsive to price increases
o Can create interest in particular good or service where there was none before
Sources of income
Returns from factors of production
o Wages from labour
o Rent from land
o Interest from capital
People with more wealth enjoy higher income as wealth creates ongoing income through owning
capital
Most people have ownership of capital through superannuation, shares and other investment funds
o Profit from entrepreneurial skills
Social welfare
o Collected through taxation and transferred from governments to consumers
o Assistance to the aged e.g. pensions
o Unemployment benefits
o Disability support payments
o Family payments e.g. Child support payments

The role of business in the economy

Firm and Industry
Business firm is an organisation involved in using entrepreneurial skills to combine factors of production to produce a
good or service for sale
Industry is the collection of firms involved in making a similar range of items that usually compete with each other,
such as financial services industry
Primary industry
o Involved in production of natural or raw resources
o E.g. rural industries, mining, forestry, fishing
Secondary industry
o Often called manufacturing industries
o Changing/combining raw materials through production process
o E.g. converting logs in woodchips or leather into shoes
Tertiary industry
o Supply services
o E.g. transport, advertising, retailing, health care

Firms production decisions

What to produce?
o Based on:
Skills & experience
Consumer demand
Capital
Business Opportunity
How much to produce?
o Based on assessment of consumer demand through market research
o Too much production lead to unused good which may spoil or go out of demand
o Too little production may lead to having harmful relationships with customers
o Smaller firms can respond quickly to a change in demand
How to produce?
o Involves combing resources (inputs) in order to produce goods and services (outputs)
o Firms will choose most efficient combination of factors
o Often a decision between labour intensive or capital intensive
Labour intensive is the use of human labour to perform tasks
Capital intensive is the use of machines and equipment to perform tasks
Relationship between resources and production

Resource base is the total supply of productive resources at any particular point in time

Land (natural resources)

o New resources can be discovered
o New technology can improve the productivity of natural resources
o Natural resources can be diminished through exploitation e.g. overfishing or deforestation
Labour
o Investment in education and training can increase productivity of nations workforces
o Decline in birth rate or an ageing population will reduce quantity of people available to work
Capital
o Investment in goods that are used in production process leads to an increase in capital
o Depreciation of goods leads to the reduction of capital
Enterprise
o Supply of enterprises increases under favourable economic and political conditions
o Uncertain political or economic situations reduce number of individuals willing to take a risk

Business contribution to the Economy and Business Goals

Healthy, growing private sector generates higher economic growth

o E.g. Stronger growth in WA and QLD due to concentration of mineral and resource industries
Provides a stronger revenue base to fund government provided services
Reduce unemployment
o Growth of business, finance and I.T. sector led faster job creation is Sydney region
Contribute to regional development
o Growth of wine industry adds to tourism and economic development in Hunter Valley, Barossa Valley and
Margaret river regions
Increase economys productive capacity

Business goals
Maximising profits
o Main objective of most firms
o Profit is total revenue minus total costs of production
Meeting shareholder expectations
o Main responsibility of company directors
o Shareholders often interested in maximising short term returns on their investment
Increasing market share
o Paid managers, who take organisational function, ability may be dependent on maximising sales
o Compromise may have to been reached between maximising profits and sales
Maximising growth
o Larger asset base in long run allows business to achieve higher profits and management may get higher
salaries and prestige
o Can lead to business failure
Satisficing behaviour
o The idea that firms will attempt a satisfactory level in all goals rather that maximising any singe goal
o Maximising profits might not in best interests of firms as excessing profits can invite competitors or
provoke the government into imposing regulations
Businesses also may have other goals such as gaining political influence, social prestige or positive social and
environmental impacts e.g. Newspapers and recycling or green energy businesses
Efficiency and production

Productivity refers to the quantity of goods and services the economy can produce with a given amount of resources,
per unit of time

Production refers to the total amount of goods and services produced

Increase in productivity represents a firm making a more efficient use of its limited sources
Increase in production can be increasing the amount of resources or the time that they are used
Increased productivity leads to increased living standards
o Less wastage of our scarce resource
o Lower production costs and high profits for the business
o Lower inflation rate
o Higher incomes
o Improved internal competitiveness of our industries

Specialisation and productivity

Division of labour (specialisation of labour)

o Businesses break down production process into sub-processes
o Allows labour to specialise in particular part of labour
o E.g. Assembly line approach to car production
Localisation of industry (specialisation of natural resources)
o Large number of businesses that produce similar goods and services congregate in same area
o Allows them to reduce production cost by sharing common infrastructure requirements
o E.g. Concentration of advanced technological industries in Macquarie park
Large-scale production (specialisation of capital)
o Businesses grow so large that they use highly specialised equipment
o E.g. Large wine produces use specialised machines to bottle, cork and label wines

Internal Economies and diseconomies of scale

Internal economies of scale are cost saving advantages that result from a firm expanding its scale of operations.
Occur when a firms output level is below technical optimum.
Take advantage of specialisation of labour by breaking up the process of production
Able to invest in more efficient capital equipment
Buy its raw materials in bulk, and bulk buying generally reduces the per-unit cost of these inputs
Can generally find a market for its by products
Can put resources into research and development, which can expand new production lines, and further reduce
per-unit costs in the future by implementing improved production techniques
Can invest in human capital, improving the skills of its labour force through training programs that are
specifically tailored for the firms needs
Larger firms usually find it easier and cheaper to raise finance for business expansion

Internal diseconomies of scale are the cost disadvantages faces by a firm as a result of the firm expanding its scale of
operation beyond a certain point. The firms output level is above the technical optimum
Management can lose touch with day-to-day running of the firm and inefficiency can increase
Large size of the firm may lead to duplication and paperwork (red tape decreases efficiency)
Management become increasingly unaware of the problems and issues faced by different workers on the
production floor
Decrease in managerial and administrative efficiency leads to an increase in per-unit production costs of the
firm
Long-run average cost (LRAC)

Point X is the technical optimum and represents the most

efficient level of production
o Average costs of production are at the lowest
o Firm has taken maximum advantage of internal
economies of scale while not suffering the disadvantages
of the diseconomies of scale
As the firms increases scale of its operations up to point X,
per unit production costs decline
o Firm takes advantage of internal economies of scale
o Firm is enjoying increasing returns to scale
As the firms increase scale of its operation past point X, per unit production costs rise
o Past the point, internal diseconomies of scale outweigh internal economies of scale
o Firm encounters decreasing returns to scale

External economies and diseconomies of scale

External economies of scale are the advantages that accrue to a firm because of the growth of the industry in which
the firm is operating and the not the results of the firm changing its scale of operations
Localisation of industry
o Closeness to main market reduces transport costs
o Closeness to good labour supply which includes workers already trained in the skills required
o Closeness to supplies of partly processed
o Proximity of cheap power supplies
o Closeness to supplies of raw materials which are costly to transport
Lower resource prices to whole industry
Increased research and development
Improved transport facilities
Better education and training of the labour force

External diseconomies of scale are the disadvantages faced by a firm because of the growth of the industry in which
the firm is operation, and are not the result of a firm changing its own scale of operations
Resource prices rise as new firms enter the industry and compete for existing supplies
Motor vehicle jams become more frequent as cities grow which leads to higher transport costs
Greater concentration of economic activities in cities raise pollution consciousness and leads to stricter
government regulations

Impact of investment, technological change and ethical decision making on a firm

Production methods
o Technological changes has increased productive capacity as existing resources are used more efficiently
o Investment has led to changes in methods used to produce goods and services
Prices
o Technology has led to more informed marketplaces and can easily compare prices
Employment
o Technology has made jobs redundant and reduced required number of staff for firms
o Increased competitiveness of overseas firms has led to manufacturing operations offshore
o New technologies have create new job opportunities
o Ethical decision making has led to more women and groups that are traditionally disadvantages and
discriminated being hired
Outputs and profits
o Business that invest in technology can provide higher quality products are lower prices
o Better able to respond to changes in market demand and can customise output to specific needs of the
market place
Types of products
 o New technology has expanded range of products that may be produced to satisfy market demand
o New production technology may make smaller production runs affordable and more flexible to customise
output to specific wants of individuals
o Ethical decision makings had led to new types of products e.g. organic food, renewable energy and
recycled paper
Globalisation
o Technology is driving force for globalisation which allows business to attract investment from all over the
world and individuals to diversify their investment
o Low cost of communications lead to free information movement from overseas between consumers and
businesses
Allows them to make better-informed decisions about their production and consumption
o Technology is facilitating emergence of a global market economy
o Businesses are able to source products from overseas but from questionable sources
Consumers and non-government organisation have placed pressure on transnational corporations to
improve their practices
Environmental Sustainability
o Minimising pollution and waste, preserving natural environment and increasing use of renewable energy
o Business may change practices is response to demand by consumer, new regulations or financial
incentives from government or due to ethical decision making
o Efforts to make businesses more environmentally stable are significant driver of investment in new
technologies