Consumption

Consumption Consumers play an important role in the economic system

Consumer any person or group that buys or uses goods and services to satisfy personal needs and wants

What do consumers buy

Disposable and Discretionary IncomeA personrsquos role as a consumer depends on his or her ability to consume This ability to consume depends on available income and how much of it a person chooses to spend now or save for future spending

Disposable income the money income a person has left after all taxes have been paid

People first spend disposable income on necessities like food clothing and housing Look at page 60rsquos chart of consumer spending

Discretionary income Leftover income that can be saved or spent on extras such as luxury items or entertainment

Education occupation experience and health all influence a personrsquos earning power and thus hisher ability to consume

Look at the chart on page 61 that shows how education affects income

Where a person lives can also influence how much a person earns city dwellers tend to earn more than those in rural areas and some regions of the country tend to be higher also

Decision Making as a ConsumerDecision making involves three parts

Scarce resources income and time

Opportunity cost

Rational choice Choosing the alternative that has the greatest value from among comparable-quality products

ConsumerismA movement to educate buyers about the purchases they make and to demand better and safer products from manufacturers

The Lemon Law

Consumers must be proactive in their buying habits

Consumer Rights1962 President John F Kennedymdashfirst protection message to Congress

bull The right to safetymdashprotection against goods that are dangerous to life or death

bull The right to be informed---information for use not only as protection against fraud but also as the basis for reasoned choices

bull The right to choose---the need for markets to be competitive (have many firms) and for government to protect consumers in markets where competition does not exist such as electronic service

bull The right to be heard---the guarantee that consumer interests will be listened to when laws are being written

President Nixon added a fifth rightbull The right to redress---the ability to obtain from the manufacturers adequate payment

in money or goods for financial or physical damages caused by their products

Using President Kennedyrsquos list Congress passed consumer-protection legislation

his finest achievement in consumer protection

How did this legislation help consumersbull Dissatisfied consumers can complain to a store manager or write to the

manufacturer

bull Consumers may take a case to small claims court or hire a lawyer

bull Local citizensrsquo action groups and local chapters of the Better Business Bureau help consumers with their rights and complaints

bull There are also many federal bureaus to help consumers

Read over the list of the federal bureaus on page 74 of your economics book

Consumer Responsibilities

CreditReceipt of money either directly or indirectly to buy goods and services in the present with the promise to pay for them in the future

The amount owedmdashthe debtmdashis equal to the principal plus interest

Principal amount of money originally borrowed in a loan

Interest amount of money the borrower must pay for the use of someone elsersquos money

Remember thisTaking out a loan is the same as buying an item on credit In both cases you must pay interest for the use of someone elsersquos purchasing power Anytime your receive credit you are borrowing funds and going into debt

Installment DebtOne of the most common types of debt

Type of loan repaid with equal payments or installments over a specific period of time

Most people buy durable goods or manufactured items that last longer than three years on an installment plan

The length of the installment period (time to pay the debt) is important in determining the size of the borrowerrsquos monthly payment and the total amount of interest heshe must pay

Longer repayment period=smaller monthly payments

Trade-offThe longer it takes to repay an installment loan the greater the total interest the lender charges

Mortgages The largest form of installment debt in the United States is the money people owe on mortgages

mortgage installment debt owed on houses buildings or land

Why do people use CreditPeople buy items on credit because they believe they require these items immediately

Many people do not want to postpone purchasing an important durable good like a car or truck They would rather buy on credit and enjoy the use of the item now rather than later

Another reason for going into debt is to spread the payments over the life of the item being purchased

Deciding to use creditThe decision to borrow or use credit involves whether the satisfaction the borrower gets from the purchases is greater than the interest payments

WhatPurchase satisfaction gt interest payments

Comparing costs and benefits

Benefit buy and enjoy the goods or services nowCosts interest payments or lost opportunities to buy other items

Checklist for buying on credit1 Do I really require this item Can I postpone purchasing the item until later

2 If I pay cash what will I be giving up that I could buy with this money This is an opportunity cost

3 If I borrow or use credit will the satisfaction I get from the item I buy be greater than the interest I must pay This is also an opportunity cost

4 Have I done comparison shopping for credit Look for the best loan or credit deal including the lowest interest rate if not paying cash

5 Can I afford to borrow or use credit now

ReviewAnswer the following on another piece of paper to turn in during class tomorrow

1 What are the advantages of repaying installment debt over a long period of time

2 Why do people go into debt

3 Go to this website and take a reality checkhttpwwwjumpstartorgreality-checkhtml

Sources of Loans and CreditThere are two major types of creditmdashusing credit cards and borrowing money directly from a financial institution

Types of Financial Institutions

An important element in money management is choosing the correct financial institution to meet an individualrsquos needs Financial institutions are businesses which offer multiple services in banking and finance

The services customers receive may include savings and checking accounts loans investments and financial counseling

The benefits consumers gain by using financial institutions includes convenience cost savings safety and security

It can be in the consumerrsquos best interest to research financial institutions and to use one institution for all their financial needs The advantages to choosing one institution include building a relationship the simplicity of having all accounts in one place and possibly lower interest rates on loans Financial institutions are more willing to offer loans with lower interest rates to loyal customers

Different types of financial institutions are available1048707Depository institutions offer banking services and loans to individuals and businesses

o Although they can be referred to as banks in general each is a distinct type of institution

o Depository institutions include

Commercial banks ndash also known as full-service banks because they offer the wide variety of services and products available including checking and savings accounts loans credit cards investments and advice operate under state and federal laws usually the largest banks insured by the FDIC

Savings amp loan associations (S amp Ls) ndash focus on providing loans and mortgages to customers who hold a savings account insured by the SAIF generally pay a higher interest rate than commercial banks provide interest earning checking accounts

Credit unions ndash a non-profit cooperative institution owned by its members members usually have a common bond insured by the NCUA usually charge lower fees and loan rates and offer higher interest rates than commercial banks and S amp Ls many offer free financial counseling accounts offered include share share draft and share certificate accounts

Brokerage firms are licensed institutions which specialize in investing They offer money managementplans to buy and sell stocks bonds and other cash investment opportunities through cash management

What is the definition of a financial institution

What are four types of financial institutions

Charge AccountsCredit extended to a consumer allowing the consumer to buy goods or services from a particular company and to pay for them later

Charge accounts may be in the form of a charge account or a credit card

Regular Charge accountsA regular charge account (30-day charge) has a credit limit of $500 or $1000 At the end of the 30 days the store sends a bill for the full amount If not paid in full interest is added

Credit limit the maximum amount of goods or services a person or business can buy on the promise to pay in the future

Revolving Charge Accounts Allows you to make additional purchases from the same store even if you have not paid the previous monthrsquos bill in full Usually you must pay 15 of the amount If not paid in full interest is added

Installment Charge AccountsItems are purchased and paid for through equal payments spread over a period of time

Part of the amount paid each month is paid to the interest and part is applied to the principal

Major items such as sofas televisions and refrigerators are often purchased through an installment charge account

Credit Cards Allows a person to make purchases without paying cash

The difference credit cards can be used at many kinds of stores restaurants hotels and other businesses throughout the United States and even foreign countries

Banks issue the cards These cards may be used to purchase items or they may be used to borrow funds up to a certain limit

Finance Chargesthe cost of credit expressed in dollars and cents

The way finance charges are computed is an important factor in determining the cost of credit

Store charge accounts and credit cards use one of four methods to determine how much people will pay for credit

bull previous balancebull average daily balancebull adjusted balancebull past due balance page 93

Annual Percentage Rates (APR)cost of credit expressed as a yearly percentage (also takes into account things like membership fees)

The APR provides a guide that allows consumers to compare costs regardless of the dollar amount of those costs or the length of the credit agreement

Debit CardsA debit card does not provide a loan

Debit cards make cashless purchases easier by enabling customers to transfer funds electronically from their bank accounts directly to the store or restaurant where they purchased goods

CreditworthinessCredit bureau private business hired to do a credit check

Credit check investigation of a personrsquos income current debts personal life and past history of borrowing and repaying debts

Credit rating rating of the risk involved in lending money to a specific person or business

Creditors also look at three other factorsthat a credit check reveals

bull capacity to paybull your characterbull any collateral you may have

Secured loan

Unsecured loan

When a financial institution makes a loan and asks for collateral

The collateral may be the item purchased with the loan money such as a house or a car It may be something of value the borrower already owns The lender can claim the collateral if the loan isnrsquot repaid

When a financial institution makes a loan to someone with little or no collateral based on reputation alone

Many times the financial institution will ask for a cosigner for the loan That person will pay back the loan if the borrower does not