Chapter 3 Your Purchasing Power. Slide 2 What Is Inflation? 3-1 Inflation and the Value of Money Inflation is an increase in prices for goods and services

Chapter 3

Your Purchasing Power

Slide 2

What Is Inflation?

3-1 Inflation and the Value of Money

• Inflation is an increase in prices for goods and services.

• Flood or hurricane can wipe out crops sending prices up.

• Consumer Price Index (CPI) measures price changes over time.

• Tool used by the US government to measure inflation

Slide 3

What Is Inflation?


• As inflation rises, the purchasing power of the dollar falls.

• You must earn more to have the same standard of living.

• COLA: Cost of Living Adjustments• Given by employers to

keep pace with inflation

Slide 4

What Are the Types of Inflation?


• Disinflation occurs when the rate of rising prices slows down.

• Example: In spring and summer, the price of swimsuits may be high and rising. In the fall and winter, however, if the price is rising, it is at a much slower rate.

• Reflation occurs when high prices are followed by lower prices and then high prices again.

• Example: When gas prices are high, people don’t buy as many big cars and trucks. When the gas prices fall they begin buying large trucks again.

Slide 5

What Are the Types of Inflation?


• Hyperinflation is rapidly rising prices that are out of control.

• Considered to be inflation at 50 percent or higher

• Example: Following World War I, Germany’s monthly inflation reached over 300 percent.

• Deflation is a decrease in prices.• Example: a computer uses a new, faster

processor may sell at a high price when it first comes out on the market. However, prices lower because newer, faster computers are released

Slide 6

What Are Causes and Effects of Inflation?


Causes• Demand-pull Inflation: Consumers want to buy more goods and services than producers supply. Businesses raise prices to balance supply with demand.

• “Too many dollars chasing too few goods”

• Cost-push Inflation: producers raise prices because their costs to create products are rising.

• When wages go up, the cost of producing the product goes up. Producers then put the burden on the consumer and raise prices.

• Affected by productivity which is the measure of efficiency with which goods and services are made.

Slide 7



Causes•Real-cost inflation: As resources become scarce or more difficult to get, prices rise in the form of real-cost inflation.

• When there is less natural gas, the cost of providing natural gas rises.

Effects• Higher employment rates

• Economist think that rising prices signal increased demand. Increased demand prompts the employer to hire more people thus lowering the unemployment rate.

Slide 8



Effects• Less spending: Rising prices cause people to either buy less because the dollar does not go as far.• Less saving: Consumers can also save less or take money from their savings to continue spending at the same level.

Time Value of Money

• Dollar you receive in the future will be worth less than a dollar you receive today.

• Example: You loan a friend $20 today. Your friend promises to pay you back in one year. The money you receive in one year will not have the same value as the money you loaned your friend. Prices have risen higher and the $20 will not buy as many goods and services.

Slide 10

Focus On . . .

Fighting Inflation• Monetary policy refers to the actions by the

Fed to stabilize the economy.o Fed controls the discount rate, federal

funds rate, and prime rate.• Fiscal policy refers to the actions by the

federal government to manage the economy. o Government raises/lowers taxes.


Slide 11

How Are Prices Set in a Market Economy?

3-2 Prices and Consumer Choices

• Cost-recovery pricing is used to recover R&D costs.• When the product is first introduced the

prices are high due to R&D to develop the product.

• Cost-plus pricing is calculated using production costs plus a markup.• Markup is the profit margin.• Example: $20 to produce. Marked up

50%. Sold for $30.

Slide 12

How Are Prices Set in a Market Economy?


• Value-based pricing is based on what consumers are willing to pay.

• Market-based pricing is set to be competitive with similar products.

Slide 13

How Do Buying Strategies Affect Prices?


• Rational buying: Selecting goods and services based on need, want, and logical choiceso Economizing is saving money and

spending only when necessary.oWaiting until it is necessary to buy a

producto Optimizing is getting the highest value

for money spent.oPurchasing in large quantities

Slide 14

How Do Buying Strategies Affect Prices?


• Emotional buying: Purchasing products based on desire rather than logic.

• Impulse buying: Buying something on the spur of the moment without thinking it through or planning the purchase.

Slide 15

What Are Selling Strategies?

Meeting demand• Convenience

• Easy location, safe place, etc.

• Customer service• Warm friendly

people, return policy, etc.

3-3 Getting More for Your Money

Slide 16


Meeting demand• The right product and

priceo Examples: meet

basic needs, offer brand names, use discount pricing


Slide 17


Meeting demand• Branding strategy: Carry certain brands in

order to attract customers who are loyal to those brands

• Discount Pricing: A business offers the lowest everyday price possible. May need to sell slightly lower quality in order to offer the lowest prices.


Slide 18



Creating demand• Advertising is informing consumers about

products and encouraging them to buy.o Advertising sources: newspapers,

magazines, TV, radio, Internet, billboards, signs, direct sales

• The target audience is a specific group of people who are likely to buy.

Slide 19



Creating demand

• Internet advertising uses banner ads and pop up ads to draw consumers attention to their products or web pages.

• Direct Advertising: Directly giving consumers information about a product.

• Samples, Coupons, etc.

Slide 20

What Are Consumer Buying Strategies?• Prepare a shopping list.

• Do not let a salesperson influence you.

• Stick to your list and avoid impulse buying.

• Shop when you are most alert.

• Comparison shop among several sellers.

• Keep receipts, warranties, and packaging.


Slide 21

What Are Consumer Rights?

3-4 Consumer Rights and Responsibilities

Many laws protect consumers.• Consumer Bill of Rights• Airline Passenger Rights• Consumer Technology Bill of Rights• Patients’ Bill of Rights• Consumer Protection Laws

o Examples: Food, Drug, and Cosmetic Act; Hazardous Substances Act; Cigarette Labeling and Advertising Act; Nutrition Labeling and Education Act; FERPA; HIPAA

Sources of Consumer Protection

• Federal agencieso Examples: USDA, FDA, CPSC,

FCC, FTC, FAA, SECo Food and Drug Administration:

Enforces laws that prevents or stops the selling of mislabeled foods, drugs, cosmetics, and medical devices.

o Federal Trade Commission: Restricts unfair methods of competition, false or deceptive advertising, inaccurate information on credit reports, and concealment of true costs of credit.

Slide 23

Sources of Consumer Protection


• State and local assistance• Consumer protection

agency or attorney generals office.

• Private Organizationso Examples: BBB, National

Consumers League, Consumers Union

Slide 24

How Are Consumers Defrauded?


Deception involves false or misleading claims made about a product.

• Bait and switch: illegal sale techniques in which a business advertises a bargain product with the intent of persuading consumers to buy a more expensive product.

• Fake sales: Business advertises a big sale but keeps items at regular price.


Deception involves false or misleading claims made about a product.

• Low-balling: advertising a basic service at an unusually low price to lure in customers and then telling them that they need additional repairs or services.

• Pyramid schemes: illegal multilevel marketing gimmick that promises people high commissions on their own sales as wells as on the sales of other people they recruit.

Slide 26



• Ponzi schemes: Fraudulent investment operation in which money collected from new investors is used to pay off earlier investors

• Pigeon drop: con artist convinces a person to give up his or her money in return for a share of a larger sum of money.

• Infomercials: TV ad with testimonials, demonstrations, and introductory prices.

Slide 27

How Can Consumers Protect Themselves from Fraud?


• Shop smart• Be aware of prices• Understand sale

terminology• Compute unit

prices• Read labels• Check packages

carefully

• Read contracts• Keep receipts and

warranties• Compute total cost• Research

businesses

Documents

Chapter 3 Your Purchasing Power. Slide 2 What Is Inflation? 3-1 Inflation and the Value of Money Inflation is an increase in prices for goods and services