Understanding Consumer Economics: Marketplaces, Consumer Behavior, and Demographics - Prof, Study notes of Economics

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GreerNe OOS Chapter Summaries Neyer rare a  Chapter 1 • Consumer Economics – the study of how people deal with scarcity, fulfill needs, and select among alternatives goods, services, and actions Introduction o Provides an understanding of how the marketplace works, what our role is in it, and how are choices affect our lifestyles • Studying consumer economics: o Enriches our lives by helping us get the things we want o Increases our understanding of the factors influencing our choices and the choices of others o Improves our understanding of how the marketplace works o Increases our awareness of what is fair o Encourages us to think carefully about how we spend and invest our money • The end result of studying consumer economics is improved decision making Why Study Consumer Economics? • By following the principles in this book, you will: o Increase self-awareness o Understand others’ consumption patterns and perspectives o Approach daily living with enthusiasm and a can-do spirit o Overcome limitations and weaknesses by knowing your rights and responsibilities o Improve your consumer behavior o Participate in actions that bring fairness to the marketplace o Take control of your happiness (at least as far as consumption is concerned) o Find ways to make profit and make your money stretch further o Discover career opportunities • Consumers – individuals or groups such as families who obtain, use, maintain, and dispose of products and services to increase life satisfaction and fulfill needs o It is estimated that about 12 percent of purchased products are never used and eventually thrown out and 80 percent of new products fail • Consumerism – the belief that goods give meaning to individuals and their rules in society o Adam Smith – founder of modern economics; first voiced this combination of consumption, social roles, and politics  Argued that the essential task of coordinating national economics should fall to consumers in his book An Inquiry into the Nature and Causes of the Wealth of Nations  Proposed that consumers be given freedom and authority in running their own economic affairs, and in the long run he felt this would benefit the nation as well  “invisible hand” • Buying or using goods and services is an act of faith – one assumes when purchasing something that the goods or services will provide full satisfaction or fulfill a need Goods and Services • Goods are tangible objects: things you can see or feel • Services are intangible actions: work done to satisfy others • Business Cycle: o Expansion – (preferred stage) period of prosperity, growth, higher output, low unemployment, and increased retail sales and housing starts; investing is growing and interest rates are low or falling o Recession – temporarily moderate decline or downturn in the economy; decline in total output, income, employment, and trade, usually lasting from six months to a year o Recovery – economic activity picks up, which leads to expansion; production and spending rise, consumer confidence improves, and employment picks up • o Scarcity – condition in which there is insufficient amount or supply, a shortage Scarcity  Unlimited wants and needs with little supplies • o Equilibrium Price – reached when supply and demand are equal Supply, Demand, and Equilibrium Price o Law of Supply – as the supply of a good or service goes up, the price comes down o Law of Demand – as the price of a good or service rises, the quantity demanded of that good or service falls • If the number of consumers increases, then it follows that demand will increase Supply, Demand, and Demographics • A successful supplier not only responds to change but also anticipates buyers’ changing preferences and, responds to changes in movement patterns • Baby Boomer Generation: 78 million people born 1946-1964 • Generation X: 45 million people born 1965-1976 • Generation Y: 72 million people born 1977-1994 • o Risk – the possibility or perception of harm, suffering, danger, or loss Risk and Opportunity Costs  Financial Risk: fear of losing money in the stock market or of buying an inferior product o Loss Aversion – a fear of loss o Research shows that women avoid risk more than men when it comes to investments o True risk and perceived risk: what may be pleasurable to one person may be perceived as dangerous to another o Time Risk – consumer do not want to waste time in finding and purchasing products o Security Risk – consumers may fear being a victim of crime, perhaps involving their credit card number or Social Security cards o Privacy Risk – consumers may fear that their buying behavior or personal information is being reported and sold to companies o Opportunity – refers a favorable outlook, a chance for progress, advancement, and action o Opportunity Cost – one alternative is selected over another, and there is a cost attached to this choice o Trade-Offs – to get something that is desired, it is necessary to sacrifice something else because of scarcity • Three Questions o There are three problems or questions that economies must find a way to solve:  What is produced? • Product – anything a consumer acquires or perceives to need  How are these goods produced?  For whom are the goods produced? • o Market Economy – exchanges are controlled by marketplace forces of demand and supply rather than by outside forces such as government control Market Economy and Competition o Command or Centrally Planned Economy – most decisions are about what, how, and for whom to produce are made by those who control the government o Property Rights – the legal rights over use, sale, and proceeds from a good or resource; allow people to buy and sell goods • Consumer Sovereignty – the premise that consumers decide which goods will survive and that producers cannot dictate consumer tastes Consumer Sovereignty o Products fall in and out of favor o Based on Adam Smith’s philosophy that consumers should guide the economy – the consumer is king • Monopoly – exists when there is only one producer and there is no substitute, such as there being one airline or one cruise ship line Monopolies o Two reasons monopolies are discouraged:  Without competition, consumers may have no choice but to pay higher prices  Monopolies may discourage new inventions or growth of new companies • Price – the amount of money a person pays to buy or use a product • Competition in the marketplace is good for consumers Economic Systems • Capitalism – characterized by open competition in a free market • Socialism – the government centrally plans, owns, and controls most of the capital and makes decisions about prices and quantities Internet and E-Commerce • Consumer-Mediated Environment (CME) – buying and selling over the Internet • E-Commerce – general term referring to exchange transactions that take place on the Internet, such as buying and selling goods, services, and information o E-Commerce can be broken down into two parts:  E-Merchandising – selling goods and services electronically and moving items through distribution channels  E-Finance – Banking, debit cards, smart cards, banking machines, telephone and Internet banking, insurance, loans, financial services and mortgages Chapter 2 • Rational Self-Interest – people make choices that will give them the greatest satisfaction at a particular time based on information they have at their disposal Introduction o Different from selfishness • Conspicuous Consumption – occurs when somebody pays an extremely high price for a product for its prestige value, leading to a much higher demand than a simple price-demand relation would indicate o A form of self expression and individual freedom • In 1776, the population of the 13 colonies was about 2.5 million, and people were highly self- sustaining and individualistic Demographic and Consumption Shifts o Most lived in rural areas and wanted freedom and independence • By the 1890s, citizens had less personal control over the production of goods and relied more on big companies for basics like food and soap o A period when dangerous untested products were being sold to unsuspecting consumers, which led to the consumer protection legislation discussed in this chapter • Consumer Movement – refers to policies aimed at regulating products, services, methods and standards of manufacturing, selling, and advertising in the interests of the buyer Consumerism and the Consumer Movement Defined o Regulations may be voluntary, by the industry initiative, or mandatory, due to written laws or statutes Consumer Movement Worldwide • One of the linkages between countries is that the substances most likely to be regulated in any country are food and drink • Another common thread is legislation regarding labeling • Legislation adopted in one country often leads to the adoption of similar legislation in another • News of a consumer fraud or health risk spreads from one country to another • Countries that share borders usually set up cooperative agreements because so many goods transverse borders, and workers cross birders for employment  John Kenneth Galbraith • The Affluent Society • Less emphasis on production and more emphasis on public service • Key advisor for John F. Kennedy • Ambassador to India • Served several government posts • Presided over a great depression and a great war o 1940s  WWII turned everyone’s attention to the war front  People were concerned about just getting goods  People could not buy what they could afford  Many women went to work outside the home  Shortage of the basics like eggs, milk, and butter  Homeowners were encouraged to grow victory gardens so that canned foods could be shipped overseas  Flush toilettes were standard, 36 percent of homes had telephones, and 91 percent owned refrigerators o 1950s  Everyone wanted new houses, cars, furniture, washing machines, and every other kind of consumer good imaginable  Grocery stores and shopping plazas replaced corner stores  Mickey Mouse Club premiered  College towns and campuses grew substantially  Frigidaire was selling 10 different types of appliances  Decade of private consumption  Split-level houses introduced  Introduction of Barbie  Food and Drug Administration (FDA) – seized boxes of Pillsbury blueberry pancake mix for misbranding; no blueberries in the product o 1960s  Pollution – undesirable change in biological, chemical, or physical characteristics or air, land, or water that harms activities, health, or survival of living organisms  Environmentalism – concern for the environment; has become a very important part of modern consumer movement since the 1960s  Bill of Rights • The right to safety • The right to be heard • The right to choose • The right to information • Parts added later by presidents o The right to a decent environment o The right to consumer education o The right to reasonable redress for physical damages suffered from using a product  1965 Immigration and Nationality Act  Age of dominance of large national general merchandise and department stores  Spread of fast-food brands  Unsafe at Any Speed (Ralph Nader) – need for auto safety  The Population Bomb (Paul Erlich) – too many people, too many cars, too much of everything, and if it continues, there will be catastrophes  The Dark Side of the Marketplace (Warren G. Magnuson) – explained the consumer movement o 1970s  Great deal of consumer protection legislation  End o Vietnam War  Changes in consumer buying patterns  Discount stores and malls grew, along with credit cards and more stores open on Sundays  Equal Rights Opportunity Act  1973 FTC Door-to-Door Sales Rule – man people felt threatened by door-to-door salespeople o 1980s  Agencies were reorganized and became somewhat less powerful  Consumers encouraged to use the laws already in the books  View was that the market should regulate itself  Increased consumer education is worthwhile if it hits the right audience at the right time o 1990s  North American Free Trade Agreement (NAFTA) – impacted trade, employment in certain industries, and prices  Earth and Balance (Al Gore) – environmental problems  Affluence, expansion, and low employment  Stock market rose steadily, hitting century highs  Bricks and Clicks – physical store and an online store  Mall of America opened  More superstores open 24 hours o 2000-Present  Recession from 2001 to 2003 and was followed by a recovery and another recession in 2008  Unemployment reached 6.1 percent in June 2003 and dropped to around 4.5 percent in 2007  College grads couldn’t get jobs as easily and many added greatly to their student loans as college’s tuitions increased  2001 USA PATRIOT Act – required every bank to adopt a consumer identification as part of its compliance with the Bank Secrecy Act  Mergers escalated for several reasons: • Antitrust legislation was less enforced • Deregulation spread • Large companies benefited from mergers • A weakened economy made smaller companies more vulnerable and willing to sell Chapter 3 Introduction • Rationality – the ability to reason • Acquisition – a strong desire for things, ideas, and information • Behavioral economics or behavioral finance or neuroeconomics – pushing the frontiers of research by introducing psychologically realistic models of economic agents into economic theory Theory, Exchange Process, and Utility • Theory – an organized system of ideas or beliefs that can be measured o Essentially systems of principles or assumptions o Useful in guiding research and explaining behavior o A fundamental consumer theory backed by research is the past purchasing behavior is a strong predictor of future purchasing behavior • In the United States, women account for about 80 percent of consumer spending • Brand Extension – a firm marketing a well-known product uses the same brand name in a different product category • Exchange Process – occurs when people negotiate with a goal of reaching an agreement • Transaction – when an exchange is fulfilled • Utility – generally refers to the usefulness of a product, service, or idea • Diminishing Marginal Utility – in a given time period, a consumer will receive less satisfaction from each successive unit Theory of Reasoned Action • Theory of Reasoned Action – behavioral intensions are based on a combination of the attitude toward a specific behavior, the social or normative beliefs about the appropriateness of the behavior, and the motivation to comply with the normative beliefs • What is important is the consumer’s attitude toward behaving a certain way and the consumer’s subjective norm Prospect Theory and Theory of Mental Accounting • Economists for the most part follow a central tenet that people are logical with their money and that the market operates sensibly • Prospect Theory – explains choice under uncertainty and led to the idea of loss aversion; people feel more pain from loss than pleasure from profit • Message Framing – outgrowth of the prospect theory; may indicate you will be happy if you buy this product (Positively Framed Message) or sad if you don’t buy it (Negatively Framed Message) • Reactance – a warning or negative message can act as a boomerang by making the risky behavior more attractive • Endowment Effect – subjects who have been given a present will demand a higher price to sell it than people who don’t have the mug would be willing to pay for one • Theory of Mental Accounting – people frame or put into context their buying and selling Consumers • Quality of life – perception and satisfaction of life • Consumption – the using up of goods • Level of Living – the way consumers are actually living • Standard of Living – a certain quality of life • Lifestyle – how one lives and includes patterns of time use and living space; it also involves what one thinks is important and how one spends money • Mass Consumption – a tremendous impact on the general economy • Consumer Decisions and Experiences o Consumers hope to increase their well-being through consumption and that there are carious indicators of well-being o In consumer economics, we are concerned about the quality of the natural environment and the sustaining of it for future generations o Consumer life is also influenced by our experiences: college, businesses, etc • Consumer Well-Being o Definition  Consumer well-being includes: • Economics or Financial Well-Being • Physical Well-Being • Social Well-Being o Socialization – the process of learning to interact with others, forming cooperative relationships, participating in society, and learning the ways of daily life • Psychological or Emotional Well-Being • Environmental Well-Being, Political Well-Being, and Spiritual Well-Being o Measurement  Human Development Index (HDI) – puts a number on well-being by combining several measures of human well-being • Consumer Price Index and Consumer Expenditure Survey o Consumer Durables – products bought by consumers that are expected to last three years or more and include automobiles, appliances and furniture o Consumer Price Index (CPI) – measures prices each month of a fixed list of 400 goods and services bought by a typical consumer’ o Consumer Expenditure Survey – collected from a national sample of over 30,000 families that provides detailed information on spending habits • Consumer Confidence o Consumer Confidence – measured and nationally reported by two organizations: Conference Board and Survey Research Center o Conference Board specializes in consumers’ plans to buy cars, houses, and appliances and to participate in activities such as traveling o Survey Research Center measures a sample of 500 consumers’ expectations about the economy and their own personal finances and tries to determine attitudes about consumption and changes and trends therein Business and Markets • The goal of business is to maximize profit • Typical Company Functions o Top management sets the goals, missions, and strategies and often answers to the board of directors o Marketing promotes, sells, conducts surveys research, and distributes goods o Finance balances current funds and procures more funds o Human relations departments take care of employee needs o R&D focuses on developing new and exciting products o Purchasing gets supplies and materials at a good price o Manufacturing oversees the production of a quality product and handles decisions on quantity o Accounting watched the books and checks costs and expenditures o Product design may be part of marketing or R&D or may be free-standing o Large companies usually hire outside firms o Consumer relations departments in large companies sell consumer goods or services to handle consumer inquiries and complaints and report consumer trends to higher management o An investor relations department is usually found if the company has stock that is publicly traded • Marketing and Consumer Psychology o Consumer-In-Control Movement – consumers want more say about products and services o Customization – specifically designed products o Market Mavens – opinion-leading consumers who are very involved in the marketplace • Entrepreneurship o Entrepreneurs – pursue new business opportunities relentlessly without becoming deterred by the limited resources they initially controlled; few are called and even fewer succeed • Women as Entrepreneurs o In 2000, the number of entrepreneurs that are women rose to 50%, and the number of women entrepreneurs in the United States rose to 9.1 million