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Topic 2: Consumers and Business

The role of consumers in the economy
Consumer Sovereignty
Factors affecting consumer sovereignty
 Marketing: Extensive research into wants/interests/desires/fears (by producers)
o Mass marketing (Media)
o Direct marketing (Direct mail/advertising on personalised web browsers)
 Misleading/Deceptive conduct: Deceived by dishonest claims
o Weight loss programs
o Baldness treatments
 Planned obsolescence: Products are designed to wear out quickly over a period of time
o Emphasizing of keeping up with trends:
 Cars that look out of date may not be driven even though they are fully
 Latest technology, e.g. iPhone
 Anti-competitive behaviour
o Reduce consumers’ ability to purchase what they really want
 Only certain brand’s accessories can be compatible with a product
 Could work with other generic accessories

Factors affecting decisions about saving or spending

 Culture
o East Asian economies save MORE compared to other industrialised economies
o Older generations save MORE compared to younger generations
 Personality
o Outgoing  Spend more (enjoy immediate benefits)
o Cautious  Save more (saving for any future need)
 Confidence/Future expectations
o Confident about economic outlook  ↑ spending + ↓ saving
o Worried about economic outlook  ↓ spending + ↑ saving
 Future expenditure plan
o May save more if there is a plan to spend more, e.g. holidays, cars
 Tax policies
o More attractive to spend
 LOW taxes on consumption
o More attractive to save
 LOW taxes on superannuation savings
 Credit availability
o ↑ credit available = ↑ spending + ↓ saving (new source of expenditure)
o ↓ credit available = ↓ spending + ↑ saving
Topic 2: Consumers and Business
Variations with income and age

 Young people (↓ income: Lack skills, experience, and education)
o More attractive to save
 Tend to dis-save/borrow against their future income to fund their education
 Spend proportionally ↑
 ↑ proportion of each extra dollar of earned income consumed
 ↓ MPS and APS
 Save proportionally ↓
 ↓ proportion of each extra $ of earned income saved
 Middle-aged people (working class: peak earning years)
o Receive income (reward input towards the production process)
 ↑ saving (fund debts and for retirement: superannuation or assets)
 ↓ MPC and APC
 spend proportionally ↓
 ↑ proportion of each extra $ of earned income consumed
 ↑ MPS and APS
 Save proportionally ↑ for future consumption
 ↑proportion of each extra $ of earned income saved
 Elderly people (retired from the workforce: no longer earn income from labour)
o ↑ MPC and APC
 Rely on their superannuation, accumulated assets and government pensions
to consume goods and services
 Borrowing against past income
 Spend proportionally ↑
 ↑ proportion of each extra dollar of earned $ consumed
o ↓ MPS and APS
 Save proportionally ↓
 ↓ proportion of each extra $ of earned income saved
Topic 2: Consumers and Business
Factors influencing individual consumer choice
 Income
o More income  More items of higher quality  Increase in utility
o Less income  Less items of lower quality  Decrease in utility
 Price
o Individuals decide if they are willing to pay the market price of the good
o Necessities: Will be bought regardless of price (requirement for survival)
o Luxury goods: Will experience a decrease in demand (some choose to forego it)
 Price of substitutes
o Bought in place of another good
o HIGH price = HIGH substitute demand
 Price of complements
o Bought in conjunction with another good
o HIGH price = LOW complement demand
 Preferences/Tastes
o Changes over time (e.g. fashion)
 Consumers who don’t derive utility from a good will not purchase it
o Innovation/technological progress
 New/better products are demanded
 Mp3 players’ vs compact discs
 Advertising
o Can create demand for goods/services where there weren’t any before
o Can make consumers less responsive to higher price (loyalty building)

Sources of income
 The return for resources Advertising
o Interest (Shares  dividends, bonds/cash management accounts  Interest)
o Profit (Revenue less expenses, interest, and wages)
o Rent (All income earned from productive use)
o Wages (incl. worker’s compensation, superannuation and fringe benefits – holiday pay
and sick leave)
 Social welfare
o Pensions (Assistance for aged): Retired people over 65 years
o Family payments: Allowances, tested according to income level
o Disability support payments: Physical illness, handicapped etc.
o Unemployment benefits People actively looking, but unable to find work
Topic 2: Consumers and Business
The role of businesses in the economy
Factors influencing a firm’s production decisions
 What to produce
o Skills and experience of entrepreneur
o Strong consumer demand  More expansion opportunities
o Specific business opportunities, e.g. niche markets (tastes/characteristics)
o Amount of capital (low start-up costs = low risk)
 How much to produce
o Business must assess level of demand
o Difficult to determine the sales level of goods; shortages/excess supplies
o Could be determined using market research; can also determine price
 How to produce
o Relative efficiency of the factors of production
o Factors of Production:
 Capital: Investment in technologies, become obsolete (depreciation)
 Entrepreneurship: Unstable environment  LOW risk-taking
 Land: Finite resources, will run out
 Labour:
 Investment in education/training  ↑ workforce productivity
 ↓ birth rate/ageing population  ↓ quantity of labour

Business as a source of economic growth and increased productive
 Goals of the firm
o Maximising profits
 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑅𝑒𝑠𝑜𝑢𝑟𝑐𝑒 𝑐𝑜𝑠𝑡𝑠
 ↓ resource costs, ↑ price of g/s
o Maximising growth
 Aim to maximise assets of the firm
 Rewards
o ↑ profits in the long run
o ↑ salaries and prestige
o Increasing market share
o Shareholders  HIGH profits
 Managers = HIGH salaries, power, and prestige (HIGH sales)
o Meeting shareholder expectations
 Overrides concerns of business managers
 Shareholders are interested in maximising short-term returns on
their investment
o Satisficing behaviour
 Achieving satisfying level of attainment rather than maximising profit (new
competitors, government regulations
Topic 2: Consumers and Business
Efficiency and the production process
Internal and External economies and diseconomies of scale
 Internal economies of scale: Cost-saving advantages that result from a firm expanding its
scale of operations (Production is below technical optimum)
o Specialisation of labour (breakdown of production process)
 ↓ advertising costs
 Bulk buying: ↓ /unit cost
 Specialist managers
 Research and Development: Investment in both human capital (tailored
training programs) and machinery
 Secure loans with ↓ interest rates
 External economies of scale: Cost-saving advantages that result from the positive growth of
the industry  Reduce long run average costs for firms in that industry
o Localisation of industry: All firms in a particular region would enjoy saving costs
 Located in area of large population w/ skilled labour
o Govt. subsidies: Providing special R&D to help promote the industry
 CSIRO and their new strain of disease resistant, high yielding wheat
 Internal diseconomies of scale: Disadvantages faced by a firm, causing per-unit production
costs to increase (↓ managerial/administrative efficiency)
 Management loses touch with day-to-day running
 Rules and regulations (Red tape)
 Worsening workplace relations: Managers are unaware of problems and
issues  misunderstanding and disputes
 External diseconomies of scale: Disadvantages that result from the growth of the industry in
which the firm is operating
o Increased pollution: In China, rapid industrialisation + weak environmental controls
 ↑ pollution problems (illness and early deaths)
o Concentration of industry: ↑ concentration of industries in one urban area 
transport bottlenecks (Raises transport costs due to ↑ property prices)
o Rising raw material costs: ↑ demand of resources = ↑ price
o Rising unemployment rates: Large size of labour market

Technical optimum: Most efficient level of production for a firm (Average costs of production
are at the lowest possible level). Point where the firm has taken maximum advantage of economies of
scale, without having to suffer diseconomies of scale
Topic 2: Consumers and Business
Production and Specialisation

 Definitions
o Productivity: Quantity of g/s an economy can produce with a certain amount of
o Production: Total amount of g/s produced
o Higher productivity: Increase in output per factor of production, per unit of time
o Specialisation: FOP’s are used more intensely for small number of production
 Improvement in standard of living
o Less wastage of resources (efficient usage)
o Lower production costs and higher profits for businesses
o Lower inflation rate
o Higher incomes
o Improved international competitiveness
o ↑ specialisation = ↑ output = ↑ profit = ↑ quality of capital = ↑ g/s quality

Type of Specialisation Definition Example
Production  Sub-processes Assembly-line approach (cars)
Division of labour ↓ time and effort = Utilising
skill in a particular focus area
Similar businesses located in Macquarie Park: Advanced
same area technology industries
Location of industry
↓ costs: sharing of resources:
infrastructure + machinery)
Intensely specialize using Wine producer: specialised
machinery machines to bottle, cork, and
Large-scale production
Use of advanced capital label wines
Topic 2: Consumers and Business
Impact of investment, technological change and ethical decision-
making on a firm through:
 Production methods
o ↑ capacity to invest in advanced capital  ↑ productivity levels  ↑ quality of
goods and services
o ↓ costs i.e. the factors of production which leads to cost advantages such as
specialisation and division of labour
o It allows businesses to have the capacity to make ethical decisions which benefit the
whole of society
o Example: investing in socially acceptable products to increase market share
 Prices
o Better understanding of the marketplace (Quick comparison of prices: consumers)
 Low profit margins (Cost reduction to compete w/ foreign firms)
 Businesses may outsource overseas (retain/maximise profits)
 Employment
o Loss of jobs: foreign firms’ competitiveness  cheaper offshore costs, or replacing
human capital w. capital goods
o Creation of jobs: Specific IT skills, e.g. computer programming
o Ethics: Hiring of more women/disadvantaged/discriminated people
 Output and Profits
o Low cost, better quality products
o More responsive to demand (customised to meet specific needs)
o ↑ demand  ↑ output  ↑ profitability
o Machine maintenance = ↑ production costs in the long run
 Types of products
o Expands range of products that could satisfy consumer demand
 Globalisation
o ↑ access to foreign markets: Cheaper products produced in an economy with fewer
o Ethics: May involve forced labour, v. low wages, dangerous conditions, denial of the
right to join a trade union and seek batter pay
 Consumers/no govt. organisations place pressure on transnational
corporations (improve practices of their subsidiaries and their suppliers)
 Cadbury: Fair trade chocolate
 Coca-Cola: Extension of health coverage to African workers (HIV positive)
 Environmental sustainability
o ↓ pollution/waste, preserving natural environment, ↑ renewable energy
o Businesses change their practices according to consumers’ demands, government
subsidies or regulations, or from their own ethics regarding the environment
 Qantas: Environmental sustainability strategy
 ↓ landfill waste and H2O consumption by 20%
 Option of flying “carbon neutral”: Paying more to offset emissions
 Cut net emissions in half by 2050
 Requirement of new tech/investment
o Efficient aircraft
o More advanced navigational aircraft technology