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Economic Education for Consumers, Fourth EditionRoger LeRoy Miller and Alan D. Staff ord

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1.1 Decisions, Decisions

1.2 Make Decisions

1.3 Understand Economic Systems

1.4 Consumer’s Role in the Economy

1.5 Advertising and Consumer Decisions

1.6 Be a Responsible Consumer

WHAT DO YOU KNOW?

1. As a consumer, do you have much infl uence on the products that busi-nesses make or sell?

2. Do businesses use advertis-ing only to get you to buy products you don’t really need?

C H A P T E R

1ConsumersThe Engine That Runs the Economy

SPECIFY SEARCH SIFT SELECT STUDY

D E C I S I O N M A K I N G P R O J E C T

GET OUT OF TOWN You and three friends have each saved $1,000 to take a trip during your spring break. You want to stay a week and have set a $4,000 budget for your trip expenses.

GOALLearn how to use the

decision making process by planning a vacation.

PROJECT PROCESSSPECIFY Lesson 1.2SEARCH Lesson 1.3SIFT Lesson 1.4SELECT Lesson 1.6STUDY Chapter Assessment

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1.1 Decisions, DecisionsGOALS• Identify several important values

you hold.

• Explain how creating a life-span plan helps you make better decisions.

• Describe what an opportunity cost is.

KEY TERMSvalues

goals

needs

wants

long-term goals

life-span

life span goals

life-span plan

short-term goals

opportunity cost

CONSUMER ACTIONFor many years Anthony has saved every penny he could with the hope of buying a small fi berglass sailboat. He fi nally has $10,000 in his savings ac-count. Recently, Anthony’s mother became ill so his family can no longer aff ord to pay his edu-cational expenses after he graduates from high school. If he wants to go to college, he will have to pay for it himself. Anthony wants to become a com-puter programmer. How should he use his savings?

You’ve Got the PowerHave you ever heard the phrase the customer is always right? If businesses want to make a profi t, they have to offer customers products they want. If they do not give customers what they want, customers will go to other businesses that do, or buy nothing at all. A business cannot succeed without customers.

As a consumer, you have the power to choose what you buy and where you buy it. You can choose not to buy from businesses whose products you don’t like or whose prices are too high. Instead you may decide to buy from businesses that stock products you want and charge prices you are willing to pay. Businesses spend lots of money each year researching what customers want.

ValuesYou have the power to make so many decisions that you may wonder where to start. Knowing your values is a good place to begin. Values are your principles—the stan-dards by which you live. When you list your values, you are making judgments. You decide what is right or wrong, good or bad, important or unimportant for you. Val-ues can be classifi ed in a variety of ways that include each of the following.

Life values are the principles that are most important to you in life. Wanting to spend time with your friends and family is an example of a life value.

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Work values are the principles that are important to you in your work. Wanting to earn a living by working for a business that respects the environment is an example of a work value.

Cultural values are principles that are important to you because of your ethnic heritage or religion. Wanting to practice your religion or dress in clothing that shows your heritage are examples of cultural values.

Social values are principles that are important to you because of the community in which you live. Wanting to help your community have good government and working to keep it clean and safe are examples of social values.

Demographic values are principles that are important to you because of how and where people live. Demography is the study of population. When people in a community grow older, have children, or move, their values often change. In the 19th century, many Americans moved west because they valued the opportunity to start a new life.

Values can vary greatly among diff erent countries and cultures. In India the cow is sacred to Hindus. They regard eating a beef ham-

burger to be a sin. To Indian Muslims, eating pork is off ensive. To sell fast food in India, McDonald’s had to replace its U.S.-style beef hamburger with a burger made of lamb and add many vegetarian items to its menu.

WhatWhat in the World?World?

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Why are diff erent people likely to hold diff erent values?

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Values Change Values are not constant. Your values will change as you learn and grow. This is also true for societies as a whole.

In the 1950s, for example, many people held the social value that mothers should stay at home to raise their children. Since then, this social value has changed for many Americans. Today, more families place a high value on a mother achieving her career goals and contributing to household income.

Diff erent People, Diff erent Values Suppose you have $20 to spend. You decide to use your money to download several songs to your iPod. In the same situation, your best friend would spend the money on a baseball cap. Different people make different choices. This does not mean that one of you is right and the other is wrong. It just means that people value things differently. Before you make a decision, consider what you value most.

C H E C K P O I N T

What are the various ways values can be classifi ed?

GoalsThe things you want to accomplish in your life are goals. They come from your values, your needs and wants, and your hopes and dreams. For example, you may be determined to attend college after you graduate from high school. This is a goal you have set for yourself. Your goals can be infl uenced by what you have seen or read. Your family and life experiences can also infl uence your goals.

Needs and WantsNeeds are things you cannot live without. Everyone needs a minimum amount of food, water, clothing, and a place to live. Your needs may include having a way to get to school and a warm coat for the winter.

Wants are the things that you would like to have but can live without. A want might be a new interactive game system or a new team jacket.

Sometimes people confuse needs and wants. For instance, you may need a warm coat for winter. This does not mean that you need the same designer coat that your friends are wearing. You need food, but you do not need junk food.

In a group, have each person list two or three important goals he or she has. Then, group members should compare and discuss their goals.

In Class In Class Activity

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Hopes and DreamsWhat do you want to do for a living after you graduate? What do you want to own in the future? What kind of person do you want to be?

These are important questions. The answers can be your goals. For example, you may want to be a computer programmer, a doctor, or a NASCAR driver. You may want to have a nice home and a good car someday. You may want to be a leader in your community or church.

A Life-Span PlanYou should expect the things you want most in your life to change as you grow older. Today you might believe that owning a nice car is your most important goal. In ten years you may be more concerned with buying a home or saving for your own children’s education. Even later you will want to have a rewarding retirement. Important events in your life, such as preparing for a career, raising a family, or enjoying retirement, make up your life cycle.

When you are young, you will set long-term goals that you want to achieve over a period of years during your life span. Your life span is the time from your birth to your death. It includes the events that make up your life cycle. You may think of your life span as a straight line that contains the events of your life cycle.

The life-span timeline shown at the bottom of this page can help you understand the relationship between a life span and events in a person’s life cycle. It shows a life span as a straight line along the top of the fi gure. Events in the life cycle appear be-neath the time in a person’s life when they might happen. If you construct a fi gure like this for yourself, it will have different events taking place at different times.

Life-span goals are the most important long-term goals you hope to reach dur-ing your life span. They may include earning a college degree, owning a business, raising a family, or achieving fi nancial security. A life-span plan is a strategy people create to help them achieve their life-span goals. In this class, you will be asked to cre-ate a life-span plan for yourself. It will help you make important choices in the future.

This text is designed to help you create your life-span plan. As you study each chapter, you will gain knowledge about yourself. You will identify goals that you hope to achieve during your life-span. Steps you may take to help you

Birth

Infancy Childhood Young Adult

Death

ElderlyMature Adult Retired

School Job Career TravelAdvanced Education Care for Parents

Raise Children Community ServiceHome Ownership Medical Care

EVENTS IN YOUR LIFE CYCLE



7


achieve these goals will be examined. Your teacher will assign tasks that will present information and provide you with skills you will need to create your life-span plan. These activities are identifi ed in this text with the life-span icon that appears on the right. As you complete assignments, you should place your work in a special fi le that you will use to create your life-span plan.

Following Chapter 17, the fi nal activity in this text is a Life-Span Plan Project. You will be asked to use the information you gather to create a life-span plan of your own. You might believe that there is little reason to create such a plan at your age. How can you predict what you will want to achieve many years from now? The value in creating a life-span plan now lies as much in learning how to do it as in the plan itself. No one expects you to create a plan that will stay the same forever. As years go by, your life will change, and you will realize that your plan needs to be adjusted or revised entirely. Still, having created a life-span plan once will help you make a better one later. Thinking about your values and goals and creating a life-span plan will help you make better deci-sions and attain greater satisfaction in your life. People are never too young to start planning for their future. Creating a life-span plan prompts you to set goals and make decisions that will help you achieve your goals.

Short-Term GoalsTo help you achieve your life-span goals, you will set many short-term goals. Short-term goals are things you hope to accomplish within a year. Your short-term goals should contribute to achieving your life-span goals over time. Suppose your most important life-span goal is to become a computer pro-grammer. A short-term goal you could set now would be to save $1,000 this year to help pay college expenses later. Achieving this short-term goal will not make you a computer programmer. But, it will make it easier to achieve your life-span goal in the future. To reach your goals, either long-term or short-term, you must identify what you want most from your life. It is diffi cult to work hard if you don’t know why you are working.

Work to Reach Your GoalsKnowing your goals is just the fi rst step. The next step is to plan how you will reach them. Again, suppose that one of your life-span goals is to be a computer

Why are computer skills important to achieving many career goals?

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programmer. In addition to saving, you can register for programming courses at high school, college, or other training centers. You can ask computer program-mers how they got started and whether they have any advice to help you.

Make a plan and stick to it. Set short-term goals that will help you achieve the things you want most in your life span. Make a budget and follow it. Save the money, earn the grades, or gain the knowledge you need to succeed. Planning will help you reach your goals.

C H E C K P O I N T

How can creating a life-span plan help you make better decisions?

Opportunity CostHaving a life-span plan can be a big help in reaching your most important goals. But what about the things you have to give up? If you become a full-time student, you won’t have as much time to have a job to earn income. The income you give up while you’re in school is your opportunity cost.

Opportunity cost is the value of your next best alternative whenever you make a choice. Because different people value different things, your opportunity cost may not be the same as a friend’s may be for the same situation.

Opportunity Cost and Decisions When making a decision, con-sider the things you have to give up or not have. Is the price too high? The opportunity cost of downloading music to your iPod, for example, could be the base-ball cap you also wanted, but you didn’t have money left over to buy.

Ask yourself if the reward gained from choosing one alter-native is worth the cost of giving up another alternative. You may decide that it is. For instance, you may think that it is better for you to be a full-time student than to have a job right now.

Today it is possible to purchase almost any prod-uct you might want over the Internet. Further-more, most products can be found and compared at a wide variety of web sites maintained by diff er-ent Internet retailers. Access the web site shown below and click on the link for Chapter 1. Click on the various retailers’ links and investigate the cur-rent price of a 40-inch fl at-screen television. How does the Internet help you make better choices in how you spend your money? What would your family have to give up to purchase the television you have identifi ed?

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UNDERSTAND KEY CONCEPTS 1. What does “the customer is always right” mean?

2. What is the difference between a need and a want?

3. Why do businesses spend millions of dollars a year to fi nd out what custom-ers want?

4. What are values? Give an example.

5. What are short-term goals?

6. How are cultural, social, and demographic values formed?

7. What does the term life span refer to? What is a life-span plan?

8. When making a decision, why should you consider the opportunity cost?

THINK CRITICALLY 9. CONSUMER ACTION Revisit this feature on page 3. Anthony had to make

a choice. If you were Anthony, what would you choose? Would you use your savings to buy a boat or to help pay your college expenses? What are your values that support your decision? Think of the option given up. What are some benefi ts you could have received from the option you did not choose?

10. Describe a need and a want in your life. Why is one a need and the other a want?

11. Write about a fi nancial decision you made based on your values. How did you arrive at this decision? What values (cultural, demographic, social) infl uenced your choice?

12. How important are life-span goals? Why do goals often change over a person’s life span?

13. List several possible opportunity costs of having a job after school.

Consider Other Options Perhaps you have been working and saving for two years without a vacation. It might be worth it to you to take an inexpensive vacation by using part of your savings, or by reducing other spending to allow for a vacation.

Goals can change just as your values can change. After you achieve a goal, reex-amine your life-span plan to reaffi rm the goals you have set, or set new goals that better suit your changing situation. Consider your values, your needs and wants, your hopes and dreams, and your opportunity costs. Then make sure your plan will help you achieve your life-span goals!

C H E C K P O I N T

What is opportunity cost? Give an example.

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1.2 Make DecisionsGOAL• Describe each of the fi ve steps in the

decision making process.

KEY TERMrational buying decision

CONSUMER ACTIONClara is thinking about buying a digital camera. She found a discontinued model she likes off ered for half price. The store, how-ever, has only one left. If she wants the camera, she must buy it immediately. How should she make her decision?

Decision Making ProcessNow that you are aware of your values and goals, how do you use this knowledge to make consumer decisions? You can follow a fi ve-step decision making pro-cess. If you follow this decision making process whenever you make a consumer choice, you will make a rational buying decision. A rational buying decision is a choice made in an organized, logical manner. Choices made this way will most likely fulfi ll your needs or wants.

The steps in the decision making process are as follows:

SPECIFY Identify the need or want that you are trying to fulfi ll. Determine your goals.

SEARCH Gather information about alternative choices you could make.

SIFT Evaluate your options. Consider your opportunity costs.

SELECT Make a choice and act on it.

STUDY Evaluate the results of your choice.

SpecifyMost people go to a store or mall to buy something specifi c. You have probably done the same. You probably shop to fi ll a need or want. But before you go shopping, you

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should identify the particular need or want that you are looking to fi ll. For example, focus your thinking from just “going shopping” to “going shopping to buy shoes.”

Need or Want? Footwear is a common need. However, you probably don’t want just something to protect your feet. You want shoes that are well made, afford able, and stylish. If your sandals have holes in the soles, you might need new ones. But what kind of sandals do you want? What style? What color?

Goals Identifying your needs and wants leads to your goals for this shopping trip. You want to buy san-dals. That is one of your goals. You look into your wallet and fi nd only $40 left from your paycheck. Another goal, then, is to buy sandals for $40 or less. And you don’t want just any style. You want sandals that go with your summer clothes. So, you really have three goals in fulfi lling your need for footwear. 1. You want to buy sandals.

2. You want sandals for $40 or less.

3. You want a style that goes with your summer clothes.

Values In determining your goals, consider your values. You could have asked a friend or your parents for more money to buy shoes, but perhaps you value your independence. You earned the $40. So, you decide not to spend more money than you have.

Goals and values may be different for different people. Suppose your friend Tina also wants a pair of sandals. She has decided to join the girl’s basketball team at school so she doesn’t have time to work. Tina asks her mother for the money to buy sandals. The fact that you value fi nancial independence and Tina values being on the basketball team does not mean that one of you is right and the other is wrong. You and Tina have different values, even if your goals to buy shoes are similar.

Values are the principles that work best for the person who holds them. Some values, such as honesty, last a lifetime. Other values change as the person changes. After basketball season, Tina’s values may change, and she may fi nd a job so that she can pay for her own purchases.

1.2 Make Decisions

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SearchHaving a plan will help you make a rational buying de-cision. You know that only four stores in your commu-nity sell shoes in your price range, and you don’t want to take the time that a cata-log or Internet order would require. So, you plan to visit each local store. You decide ahead of time that you won’t buy until you have seen all the sandals.

Plan Your Search You have outlined some good steps to get information for your purchase. Comparing the sandals from four stores will help you make a rational buying decision. You will know your options.

Avoid Impulse Purchases Many times people make impulse purchases. An impulse purchase is a purchase made on a whim, without using a decision mak-ing process. In other words, you see something that you must have, so you buy it without con-sidering any alternatives.

Sometimes impulse buying is a wise choice. If you see a product you use regularly at a low price or that is hard to fi nd, buying it immedi-ately might be a rational decision.

Although an impulse purchase can turn out to be a good choice, it often isn’t. You may go to another store and fi nd the same thing at a bet-ter price. Or, you may discover that you wish you had spent your money on something else. Hav-ing a plan and sticking to it can help you control the urge to buy on impulse.

SiftThe next step is to consider all your options. You went to four shoe stores. You saw a nice pair of black leather sandals for $38 at the fi rst store. The other pair you liked was at the last store you visited. The sandals were a plain tan fabric and cost $32 on sale. All other sandals were either out of your price range or you didn’t like them.

Retail and grocery stores place small, inexpensive items near the checkout counter because they know customers will buy them on impulse.

F IY

Does shopping with a friend make it easier or harder for you to make rational buying decisions?

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Look at Your Options Making a decision without evaluating all your op-tions can cost you. For instance, imagine you go shopping for a shirt. You buy a shirt you like at the fi rst store you visit and go home. By doing this, you missed out on a better shirt at a lower price that you would have found if you had continued to shop at the second store. By not completing the decision making process, you ended up paying more and buying a shirt you don’t like as much as the one you missed.

Look at Your Opportunity Costs Evaluating the benefi ts and costs of your options is an important step in the decision making process. By doing so, you are making a rational choice, not an impulse purchase.

Let’s say that you are leaning toward buying the leather sandals, because you think leather will last longer than fabric sandals. One opportunity cost of these sandals is the second best use for the extra $6 that would be in your pocket if you bought the $32 fabric sandals instead. You could use that $6 to buy pizza. By choosing the leather sandals, you would be giving up the benefi ts of the $6—having pizza for lunch.

A trade-off of choosing the fabric sandals may be the shorter time you can use them. If the fabric sandals wear out quicker than the leather ones, you will get less use out of them than you would the leather sandals. Plus, you may have to buy another pair of sandals before the summer is over.

You have evaluated all the benefi ts and costs of each option. Now you are ready to make a rational buying decision.

In Class In Class ActivityOn average, American teenagers spend four hours or more each day using the Internet. Answer the following questions. How much time do you spend on the Internet each day? What else could you be doing

in that time? What opportunity costs result from your use of the Internet?

1.2 Make Decisions

SelectThis is it! This is why you have gone through the steps in the decision making process. Compare the benefi ts and costs of each option, and decide.

Let’s say you decide to buy the fabric sandals. You go to the store and buy the sandals for $32. Then you buy your pizza and have a wonderful lunch. Later you invite a few friends over to watch a video, and you wear your new sandals. You are happy with your decision.

StudyLearning is an ongoing process. You can learn important lessons from the results of your decisions. Would you do the same thing again? If so, why? If not, what would you do differently?

Suppose that a month after you buy the sandals, you are no longer happy with your selection. The sandals already look worn out, and it is only the middle



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You have a part-time job at a dis-count store that pays $8 per hour after taxes. Your boss asks you to work next Sunday. You will be paid an overtime rate (1.5 times your regular rate of pay) if you accept. However, you have a big math test on Monday, and you were planning to study on Sunday. How much will you earn if you agree to work eight hours on Sunday? What are the op-portunity costs of each option?

SOLUTIONYou will earn $96 if you work eight hours on Sunday.

$8.00 × 1.5 × 8 = $96

If you choose to stay home and study, the opportunity cost of this decision is the $96 you are giving up and the benefi ts the income would bring you.

If you choose to work on Sunday, the opportunity cost of this decision is the better grade you could earn on the math test.

Math of Money$ $$

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of summer. Study your decision. Should you have bought the leather sandals instead, even though they cost more? Maybe they would have lasted longer. Now you have to save to buy another pair.

At some point, you will regret a purchase decision you made. Even though you made a rational buying decision, given the information you had at the time, a product still might not live up to your expectations. If you had known the fabric sandals would last only a month, you probably would have chosen differently.

You have learned something, though. Buying the lowest-priced item isn’t nec-essarily the best choice in all situations. Maybe next time you will choose durabil-ity over price for products you want to last a long time.

You can also learn from purchase decisions that you don’t regret. Think about what went right, and do it again next time. By using the decision making process, you will increase your chance of buying the product that fi ts your needs and wants best.

C H E C K P O I N T

Describe each of the fi ve steps in the decision making process.



15



SPECIFY Write out your goals for your trip with three other people. For instance, you might all want to go to a beach or to another country. To put together this trip, your group has to agree on where you would go, where you would stay, what you would want to do there, and so on. List four places that you would want to go that might also fi t your budget.

✔

UNDERSTAND KEY CONCEPTS 1. If you decide you need a new winter coat, which step in the decision making process have you

completed?

2. What is the difference between a rational buying decision and an impulse purchase?

3. What is the difference between “focusing on your needs, wants, and goals” and “just shopping”? What could happen if you don’t identify your needs and wants or determine your goals before you go shopping?

4. Think of a particular product you would like to buy. What kinds of information would you gather about your options?

5. What is the purpose of studying your buying decisions after they are made?

THINK CRITICALLY 6. CONSUMER ACTION Revisit this feature on page 10. Clara must decide whether or not to buy

the discontinued digital camera she saw offered at half price. She must decide now. If you were Clara, how would you go about making this decision? What additional information would you want before you could make a rational buying decision? What decision would you make? Why?

7. Think of a purchase decision you have to make. Follow the decision making process, and write what you would do at each step. Be sure to list the opportunity cost of each option.

8. MATH Tara volunteers at a neighborhood assisted-living home. She hopes to be a director of an assisted-living facility someday. To volunteer, Tara gave up a job that paid her $7.50 per hour. She usually worked 12 hours a week. How much income has Tara traded for her experience as a volunteer? Do you believe she made a rational choice? Why?

9. Think of something you bought on impulse. Would you have bought it if you had gone through the decision making process? What would you have discovered from the process that you didn’t know before you made the impulse purchase?

1.2 Make Decisions




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GOALS• Describe four economic systems.

• Explain how demand and supply work.

KEY TERMSproduction

resources

economics

profi t

scarcity

demand

supply

equilibrium price

Economic SystemsEvery nation has an economic system. An economic system is the way a nation uses resources to produce goods and services. Production is the creation of goods and services. Manufacturing products, such as cars or pencils, is prod uction. Providing services, such as dry cleaning, is production too. A dry cleaner’s product is clean clothes.

Producing goods and services requires resources. Resources are things that are used to create other goods or services. Experts sometimes divide resources into two groups: human and nonhuman resources. Human resources are the skills, training, and abilities people have to complete tasks that result in the production of goods or services. Nonhuman resources are the raw materials, tools, and manu-factured products, such as oil, tractors, and lumber, that are used to make goods and services.

Automobile manufacturers, for example, need metals, plastics, and other materials to make a car. They also need special equipment, workers trained to run the equipment, and buildings for the equipment and workers. After the cars are built, they are shipped to various car dealerships where salespeople sell the cars to consumers. These are just a few of the human and nonhuman resources required to produce the car you want to buy.

CONSUMER ACTIONPablo is the assistant man-ager of the Double Dip ice cream shop. Another ice cream shop just opened up in town. Pablo noticed that Double Dip is losing customers to the other ice cream shop. What actions should Pablo consider to win back customers?

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Economics is the study of how we make use of our resources. In this lesson, you will learn about four types of economic systems. These are traditional, com-mand, market, and mixed economies.

Traditional EconomyThrough most of history, people have lived in traditional economies. In a tradi-tional economy, ways to produce products are passed from one generation to the next. Parents teach children how to produce goods and services. Children in turn pass these methods on to their children.

Tribes in remote areas of the world still live in a traditional economy. Parents teach children how to produce tools as well as how to hunt, weave baskets, and create jugs to carry water.

Our society still contains some elements of a traditional economy. Your parents probably taught you how to cook, clean, and use a bank account.

Command EconomyThrough most of the 20th cen-tury, several nations had com-mand economies. In a command economy, the government owns most resources and makes most economic decisions. Each com-pany receives a government plan that tells it what to produce. The government determines all prices, styles, colors, and even the amounts of products produced.

Individuals within a command economy have no say in produc-tion and often not even their role in it. If the government tells you that you will be an assembly-line worker, then that is what you will be.

The former Soviet Union was one of the best-known countries with a com-mand economy. In the late 20th century, the Soviet Union broke up into different countries and moved toward a market economy. Now the best-known command economies are North Korea and Cuba.

Market EconomyThe primary economic system in most industrialized countries is a market, or capitalist, economy. In a market economy, people, rather than the government, own the resources and run the businesses. The purpose of most businesses operating under a market economy is to earn a profi t.


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How did these people learn the skills they needed to grow and harvest rice?



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Profi t is the difference between the money received from selling a product and the cost of producing that product.

Profi t = Price – Cost

Individals, not the government, make most economic decisions in a market economy. Businesses are free to choose which products to produce and how to produce them. They can set their own prices.

Customers are free to buy any goods and services they choose. Buyers and sellers are free to make transactions among themselves, without government interference.

Mixed EconomyThe economic system in the United States is not a pure market economy. Our gover-n ment does control the economy in some ways. For example, it sets the rates that public utilities, such as electric companies, can charge consumers.

For the good of society, the government also sets limits on what businesses and individuals may do. For example, no one is allowed to discard hazardous waste into a river. Also, a business may not make false claims about its products.

Because our economy is a mixture of a market economy with some aspects of a command economy (government control), our system is really a mixed economy. Characteristics of a market economy, however, are dominant in our economic system.

Suppose businesses in a foreign country manufacture widgets. Because there are low wages in that country, they are able to sell their widgets at a very low price. To keep out competition, the government of the foreign country has placed a hefty tax on products its people buy that were made in other nations.

A plant in your community manufactures similar widgets. The United States has no trade barriers and imposes no taxes on widgets made in foreign countries. Foreign companies are able to sell widgets at a lower price to your customers than your local fi rm must charge to earn a profi t. When the local fi rm tries to export its widgets to the foreign country, the foreign country taxes its products at a high rate. Because of this situation, the plant in your community loses sales and is forced to shut down. As a result, although the price of widgets in the United States is very low, U.S. workers who used to produce widgets must now fi nd other work because of foreign competition.

Would you ask your representative in Congress to support import taxes on widgets from the foreign country? Why or why not? What are some possible long-term consequences of this action?

VOTE Your Wallet



19

C H E C K P O I N T

What are the primary characteristics of each of the four economic systems?

Demand and SupplyThe basic problem facing every economy is scarcity. Scarcity is the situation in which consumers’ wants are greater than the resources available to satisfy those wants. Resources are required to produce goods and services, and resources are limited. Resources used to produce one product can’t then be used for another. Every society must decide what it will use its scarce resources to produce.

In a market economy, the choices individual consumers make every day determine how society’s scarce resources will be used. By your choices, you and every other con-sumer determine what will be produced, how much will be produced, and what the prices will be. Your choices, together, create the market forces of demand and supply.

DemandDemand is the quantity of a good or service that con-sumers are willing and able to buy at various prices dur-ing a given time period. So to be included in the overall demand for tacos, you must fi rst have enough money to buy them (the ability). Then you must be willing to spend your money for tacos instead of for something else (the willingness).

Say you have the money and are willing to spend it on tacos. You might buy four of them each week if their price is $1 each. Your quantity demanded for tacos would then be four per week.

But how many would you buy at different prices? Say the price went up to $2 each. Maybe now you would buy only two tacos a week. The law of demand says that consumers will purchase more of a product at a lower price than at a higher price.

When the relationship between price and quantity demanded is shown on a graph, it is called a demand curve. In the demand curve on page 20, notice that the demand curve slopes downward from left to right. This means that as the price goes up (along the vertical y-axis), the quantity demanded goes down (along hori-zontal x-axis). As the price of tacos goes up, consumers will buy fewer of them.

SupplySupply is the quantity of a product that producers are willing and able to make available for sale at various prices over a given time period. The law of supply says

How would the quantity of pizza you buy be infl uenced by a single 50 percent off coupon you cut from a local newspaper?

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that producers are willing to offer more of a product for sale at a higher price than at a lower price. As the price rises, the quantity supplied increases.

This relationship between price and quantity supplied, shown on a graph, is the supply curve. Notice that the supply curve graph, above, slopes upward. As the price of a product goes up, producers will supply more of that product for sale.

EquilibriumBy combining the supply and demand curves on the same graph, you can see how supply and demand together determine how much of a product will be produced and the equilibrium price. Theequilibrium price for a product is the price at which the quantity supplied exactly equals the quantity demanded of that product. That is, at the equilibrium price, consumers are willing and able to buy the same amount of the product as producers are willing and able to supply.

In the graph, the equilibrium price is the price at which the supply and demand curves cross. For this example, suppose that when tacos are offered for sale at $1 each, consumers will buy 100 of them. At this price, producers supply exactly the same number of tacos to the market.

Surplus What happens if taco producers raise the price to $2 each? Accord-ing to the law of demand, consumers will buy fewer tacos. In the surplus graph, the price of $2 corresponds to a quantity of 50 on the demand curve. In this case, at $2, consumers will demand only 50 tacos. Maybe they will choose to buy hamburgers or pizzas with their money instead. But at $2 on the supply curve, taco producers will choose to supply 150 tacos. The higher prices encourage them to make more tacos in the hope of earning a greater profi t per taco.

Demand Curve

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The result, however, is a surplus of 100 tacos. Producers supply 150 tacos, but consumers buy only 50. The excess quantity supplied, or surplus, will eventually force produc-ers to lower the price so they can sell their overstock of tacos.

As the price comes down, consumers will buy more tacos until the price returns to the equilibrium price. At the equilibrium price, the quantity demanded equals quantity supplied.

Shortage The market forces of supply and demand cause prices to reach equilibrium no matter which way they go. In the shortage graph, you can see the result if prices fall below the equilibrium price.

Suppose that the price of tacos is $0.50 each. Consumers will be willing to buy more of them. But producers receive less per taco, encouraging them to use more of their re-sources to make something else that they hope will be more profi table. They will supply fewer tacos for customers to buy. In the shortage graph, the price of $0.50 corresponds to a quantity of 125 tacos on the demand curve. But at $0.50 on the supply curve, producers are supplying only 75 tacos. There is a shortage of 50 tacos.

This shortage creates upward pressure on the price. Consumers are willing and able to buy more tacos than are available for sale. To take advantage of this excess quantity demanded, producers will start raising the price and increasing the quantity they supply, until equilibrium is reached.

These examples show how demand and supply work together to determine how much of a product is produced and at what price. As you can see, the buying decisions you and other consumers make infl uence how the economy works.

Suppose you owned a pizza restaurant. Create an economic sce-nario similar to the taco example used in this lesson. Draw graphs to represent what you think would be the supply, demand, and equilib-

rium price for your pizzas.


C H E C K P O I N T

How do demand and supply work together to determine prices and how much producers will produce?


Surplus Graph

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10075 125Shortage

$1Pr

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UNDERSTAND KEY CONCEPTS 1. What is the difference between human and nonhuman resources?

2. Describe the four economic systems identifi ed in this chapter in your own words.

3. What happened to the economy of the former Soviet Union during the late 20th century?

4. Why do most nations really operate as a mixed economy?

5. Why does a demand curve normally slope downward from left to right?

6. When the demand and supply curves are on the same graph, how do they show the equilibrium price?

THINK CRITICALLY 7. CONSUMER ACTION Revisit this feature on page 16. Pablo is facing competition from another

store. Make a list of things Pablo might do to win back his customers and still earn a profi t.

8. Write about a purchase you recently made. Describe how both you and the seller benefi ted.

9. Draw a chart to illustrate the production of a product you know something about or that you can imagine. Start with bringing together the raw materials, production, distribution, and the sale to the customer. Label the human and nonhuman resources for each step.

10. Think of a successful business in your neighborhood. How does this business serve its custom-ers? How do its customers help make it a success?

11. Imagine what it would be like to be a manager of a factory in a command economy. Write a paragraph describing your responsibilities. Then imagine what it might be like to be a manager in a similar factory in a market economy. Write a paragraph describing these responsibilities. Then write a paragraph about the differences you notice between the two economic systems.

12. Suppose the equilibrium price for tickets to fi rst-run movies is $10. In terms of supply and demand, explain what happens if theaters raise their price to $12 per ticket.



SEARCH Write a plan for gathering the information on costs for your group trip. Then follow your plan to gather the information you need to determine how much the trip will cost. Assign one place to each person to research. Look in travel magazines, talk to a travel agent, get on the Internet, or look in the travel section of your local paper. Don’t forget about meals!

✔




23


GOAL• Explain the role of consumers in

determining what is produced in a market economy.

KEY TERMSconsumer

consumer economics

Making Decisions in a Market EconomyIn a market economy, customers and businesses operate without government in-terference. Consumers are free to buy. Producers are free to sell. Both buyers and sellers gain in a transaction because they both get what they want.

Suppose you spent $60 for a wool sweater at a store. You bought the sweater because you valued it more than the $60 you spent to get it. The store sold the sweater for $60 because it could make a profi t at that price. Both buyers and sell-ers benefi t when they make exchanges in a market economy.

Information for the EconomyExchanges in a market economy do more than benefi t buyers and sellers. They also provide information that helps the economic system work.

The Merchant When customers buy items, merchants (retailers) gain infor-mation about customers’ buying habits. If more people buy the same sweater that you did, the merchant will order more sweaters from the manufacturer.

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CONSUMER ACTIONYolanda paints houses to earn money while she is going to school. She is concerned, because after she pays for the paint, brushes, and gas to get to the job, she doesn’t earn much for her work. What can she do to help her business be more profi table?



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The Manufac turer The merchant’s request for more sweaters might cause the man-ufacturer to place new orders for wool. If lots of consumers buy wool sweaters, then sweater manufacturers might hire ad-ditional workers to make more sweaters. Your consumer deci-sion helped to determine what the manufacturer would make and what the merchant would offer for sale.

PricesPrices also provide informa-tion that infl uences a market economy. Let’s say Company A sets a higher price for similar products than Company B. Most consumers will buy from Company B, so Company A

will make few sales. The lack of sales tells Company A that it must change if it wants to stay in business.

Company A has three basic choices. 1. Lower the price.

2. Convince customers to pay the higher price.

3. Stop offering the product for sale.

The owners of Company A will make the choice they think will lead to the greatest profi t.

The Profi t MotiveThe most important reason to run a business in a market economy is to earn a profi t. Companies that do not earn a profi t will not last. They can increase profi ts in three ways. 1. Reduce Costs They might fi nd less expensive raw materials or buy

machines that are more effi cient at producing the product.

2. Change Price By changing prices, the company may increase profi ts. It could lower prices to gain more sales. Or, it could raise prices and earn a larger profi t on each sale.

3. Increase Quantity of Products Sold Businesses often use advertising to encourage consumers to buy more of their products.

If wool sweaters are expensive, what alternatives do consumers have?P

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Consumer EconomicsA consumer is anyone who buys or uses products. Most of the time, consumers purchase the products they consume. In some cases, consumers use products bought by others. You might ride your friend’s bicycle or watch your brother’s television.

These are acts of consumption. It is more the act of use that makes you a consumer than the act of buying. Consumer economics is the study of the role consumers play in an economic system.

Consumers in ChargeMore than 200 years ago, a British economist, Adam Smith, described an idea he called consumer sovereignty. The word sovereignty means to be in charge of something. Smith argued that in a mar-ket economy, consumers are in charge. Consumer choices determine what goods and services are produced.

Profi ts result from selling products for more than it costs to make them. A business that sells no products will earn no profi t. To earn a profi t, businesses must produce products that consumers buy. Therefore, when consumers spend their money, they determine what prod-ucts are produced.

Suppose two restaurants open near your school. One sells pizza, and the other sells sandwiches. You and your friends prefer to buy pizza rather than sandwiches. If many consumers prefer pizza over sandwiches, can the sandwich shop stay in busi-ness? You and your friends, along with other consumers in your area, have the power to decide which restaurant will succeed. In an economic sense, the consumer rules.

What does this photo indicate about the restaurant’s products?

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In a group, make a list of fi ve local companies that have gone out of business. Discuss and report on what you think happened to cause them to close.


Benefi ts of CompetitionCompetition is the contest among sellers to win customers. Competition exists when several companies offer similar products for sale. When you buy an apple, you probably don’t care where it was grown. You care about its price and quality. A farmer who offers apples for a higher price than other farmers won’t sell many. Or, if the farmer’s apples are of poor quality compared to other farmers’ apples, customers will buy from the other farmers.



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In a recent year, more than 16 million businesses were owned by individu-als in the United States. Of these, only about 12 mil-lion earned a profi t.

F IY

Competition is at the heart of market economies. Competition forces busi-nesses to serve consumers. The only way companies can earn a profi t is to offer good quality products that consumers want to buy at a fair price. Business owners may think they are working for themselves, but they are really serving consumers.

Effi ciency and Profi tsBusinesses use resources to create goods and services, and resources cost money. Companies must pay workers and buy raw materials and equipment.

As companies compete, they must fi nd ways to use their resources effi ciently. In other words, they must produce products at low costs so they can sell the products at a price consumers are willing to pay and still make a profi t.

Suppose that two companies produce skate-boards. Company A is very effi cient and pro-duces high-quality skateboards at a low cost. Company B is not effi cient and produces low-quality skateboards at higher costs. Because Company A produces at a lower cost, it can offer its skateboards to consumers at a lower price and still make a profi t.

If you have a choice of buying a better skate-board at a lower price from Company A, you will most likely buy from Company A. Most consumers will not buy from Company B, so Company B won’t make a profi t. Eventually, Company B will go out of business.

Profi table companies are doing these three things. 1. Selling products consumers want to buy.

2. Selling products at a price consumers are willing to pay.

3. Taking in more money from sales than the company spends to produce the products.

Profi ts also infl uence how businesses make their decisions. A company that is profi table is better able to pay for new tools or hire more skilled workers. This can help it make even more desirable products. It can also buy more advertising to infl uence consumers.

As a consumer, you play a vital role in our economic system. As you buy goods and services, you create sales that provide profi t. To carry out your role in the economy, you need to make good choices.

C H E C K P O I N T

How do demand and supply act together in a market economy to set the equilibrium price for a product?



27

UNDERSTAND KEY CONCEPTS 1. Why do both buyers and sellers benefi t when they complete transactions?

2. How do prices and transactions between buyers and sellers help the economy work?

3. What three choices does a failing company have for trying to increase its profi ts?

4. What does the term consumer sovereignty mean?

5. List three things that a profi table company does.

6. Why do companies that do not serve their customers well usually fail?

THINK CRITICALLY 7. CONSUMER ACTION Revisit this feature on page 23. Yolanda wants to fi nd a way to make

her house-painting business more profi table. If you were Yolanda, what alternatives would you consider for increasing your profi ts? What choice would you make? If your choice didn’t result in greater profi ts, what alternatives would you consider?

8. Identify a local business that you believe is profi table. Describe how its profi ts allow it to serve you better and infl uence your spending decisions.

9. In what ways is the consumer in charge? When you are in a store, do you think that you are in charge of any transactions you make? Why or why not?

10. Think of two stores that compete with each other to sell similar products. Write about how they compete and how these stores try to convince consumers to buy their products.

11. What are some actions that businesses take to increase effi ciency? Think of a business in your community that you know has increased its effi ciency. What did the business do?

12. Recall a recent purchase you made. What information did you provide to the seller? What do you think is a possible consequence of the seller having this information?



SIFT Now that your group has gathered information about costs for your trip, you can evaluate your options. Write down and discuss the benefi ts, costs, and opportunity costs for each option. Also, record your preferences for mode of transportation, lodging along the way, or any other details of the trip.

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GOALS• Describe diff erent types

of advertising.

• Explain how you can recognize deceptive advertising.

KEY TERMSadvertising

puff ery

Types of AdvertisingBusinesses advertise to encourage consumers to buy their products so they can make a profi t. Advertising is a paid form of communication sent out by a busi-ness about its product or service. Different types of ads try to infl uence consum-ers in different ways. Some want to make you aware of new products. Others provide information about product features. Still others compare a business’s products to its competitors’ products to try to show you that its products are better.

The information in ads can help you make a rational decision. Ads can also entertain you while they promote their product. The customer is in charge, so businesses want to let you know about their products. More customer awareness can lead to more sales.

Brand AdvertisingThe purpose of brand advertising is to cause you to remember a particular brand name. The advertiser hopes that if you remember the brand name, you will be more likely to buy the product when you shop.

CONSUMER ACTIONEmil saw an ad on TV for tooth-whitening strips. The ad featured a smiling movie star and said that the product would make teeth three shades lighter. Emil wanted whiter teeth, so he bought the strips. He applied them every night for two weeks but didn’t notice any change in the color of his teeth. What decision making mistakes did Emil make? On what kind of ad did he base his decision?

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This type of advertising is often used to introduce new products to consum-ers or to reinforce consumer loyalty to an existing brand. For example, think of soft drinks. If you usually buy the brand you think of fi rst, then brand advertising prob-ably has infl uenced your buying decisions.

Jingles and Slogans Advertising jingles or slogans are an effective type of brand advertising. Have you ever caught yourself humming a jingle from a radio ad? These catchy tunes entertain you, so you remember the brand.

Benefi ts of Brands A benefi t of brands is that if you like the product qual-ity when you buy it the fi rst time, then you can usually depend on getting the same quality the next time you buy that brand. You won’t have to spend as much time looking for the quality you want.

Costs of Brand Advertising To pay the cost of advertising, businesses may have to increase the price of the product. If you look at all your options, you will notice that often the price of the familiar brand is higher than the price of unfamiliar brands or generic products that carry the name of the retail store.

Unfamiliar brands and unbranded products could have the same quality as the familiar brand, yet cost less. Shop around and evaluate your options.

Informative AdvertisingInformative advertising is designed to influence you to buy a product by educating you about the product’s benefits. This type of ad is often used for complex or highly technical products that consumers may not understand, such as computers and automobiles.

For example, an ad for a car may explain the benefi ts of features such as anti-lock brakes, fuel-injection systems, or side impact air bags.

Informative Ads and Decision Making Informative advertising provides information that helps you make a good buying decision. After all, you need to know what anti-lock brakes do before you can decide if you want them.


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But keep in mind that the purpose of any advertisement is to sway you toward buying the advertised product. No ad will tell you about the downside of the product or about the lower price at a competitor’s store.

Comparative AdvertisingSome advertising tries to win your favor by comparing its product’s qualities to those of a competing product. This is comparative advertising. The purpose of the ad is to convince you to buy the advertised product instead of the targeted competing product.

To accomplish this goal, comparative ads will always be slanted in favor of the advertised product. For instance, fast-food chain A may advertise that it offers a healthier menu than does fast-food chain B. This may be true. Chain A’s burgers might also taste like hockey pucks, but their comparative ad will not mention this.

Comparative Ads and Decision Making Comparative ads supply useful information. From them, you can learn what the advertiser considers to be the best qualities of its product. If you value these qualities, you might evaluate the product further.

Comparative ads also tell you the competitor’s weaknesses. Though the weaknesses may be ex-aggerated, at least you know what to investigate when you evaluate the competing product.

Defensive AdvertisingTo counter attacks from comparative ads, businesses often use defensive advertising to respond to claims made by the other companies.

A company selling satellite television service made this off er in a newspaper ad.

What factual information does this ad provide? What questions would you want the company to answer before you purchase its service? What else would you do before signing up with this service?

Inside the Numbers5 4 84 92 3

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If the producer of Brand X detergent claims its product removes stains better than Brand Y, the producer of Brand Y may respond by pointing out that its product is color-safe and will not cause clothing to fade after repeated washings the way Brand X does.

Defensive Ads and Decision Making Defensive advertising does not provide a complete or balanced picture of a product any more than com-parative advertising does. The company is trying to convince you that its product is the best choice.

Just recognize comparative advertising and de-fensive advertising for what they are. Use the infor-mation they supply along with other information you gather when you evaluate your alternatives.

Persuasive AdvertisingPersuasive advertising is designed to appeal to your emotions to infl uence you to buy, but it doesn’t provide much useful information. These ads try to convince you that owning a particular product will make you happier, more successful, or more satisfi ed. The ads focus on creating a desire in you to buy the product rather than on providing information that might help you evaluate it.

Persuasive ads often portray attractive people who appear happy or popular because they are using the ad-vertised product. The ads are trying to suggest that you will be as happy or popular as the people in the ads if you use this product.

Persuasive Ads and Decision Making Most cosmetics use persuasive advertising. Consider the cosmetics ads you have seen recently on television. You probably cannot identify much factual information in them.

When you evaluate a product, remember that owning a particular product is not likely to change your life in any signifi cant way. Ignore persuasive ads in your decision making process.

Benefi ts and Costs of AdvertisingBusinesses spend over $280 billion each year trying to infl uence consumer buying decisions. Businesses advertise because they believe it will help them earn a profi t.

Nearly 150,000 Americans join the military each year. The military runs the majority of its advertising during sports programs.

F IY


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No matter what you think of the adver-tising that you see every day, you and other consumers are paying for it indirectly. Com-panies won’t spend a dollar for advertising unless they believe it will help them earn a profi t. The cost of advertising is then built into the price you pay when you buy goods and services.

How Consumers Benefi t from Advertising Consumers may benefi t from advertising because the increased sales generated by advertising allow businesses to produce a higher volume of products. Higher volume often means lower produc-tion costs per product, and the lower costs may be passed on to consumers in the form of lower prices. This consumer benefi t from advertising may or may not happen.

No matter what, businesses will continue to advertise to try to infl uence your decisions. Your best option is to learn to use the information that advertising provides to help you make rational buying decisions.

In 2008, companies spent up to $3 million to buy 30-second television spots during the Super Bowl. In a group, list and describe at least fi ve commercials that aired during the Super Bowl or other sporting

events. Identify the type of advertising that each one represents. What can you conclude from this?


Deceptive Ads versus Puff eryIt is often diffi cult to draw a line between which advertising is deceptive and which is not. Advertising never gives a totally balanced presentation of a product. To sell their products, advertisers try to make them look as good as possible, which can involve some exaggeration. The difference between legitimate and deceptive adver-tising is that deceptive advertising is deliberately designed to mislead you.

C H E C K P O I N T

Identify and describe characteristics of each of the types of advertising presented in this lesson.

How much attention do you pay to advertisements shown during televised sporting events?

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A Minnesota car dealer recently placed ads that off ered cars for “half price.” The attorney general of Minnesota sued him for false advertising. The dealer explained that the advertised cars were being leased, and the cost of a three-year lease was about half of the price of buying a car. He argued his ads

were correct and honest. The courts did not agree and required him to stop using the ads. Do you believe the courts were right? Why or why not? Would you be suspicious of any ad that off ered a car for half price? How would you check it out?

Consumer ALERT!


Puff eryThe trick in evaluating advertising is to know how to distinguish innocent exag-geration, called puffery, from truly false claims. Puffery is legal. Deceptive adver-tising is not.

Factually WrongAdvertisements that contain factually wrong statements are deceptive. If a com-pany advertises that its vitamin supplement will “cure” arthritis, its advertisement is deceptive unless the company has proof that the statement is true. Often, this proof must come from scientifi c studies.

The government has the power to require companies to stop advertising deceptively by imposing heavy fi nes if they don’t stop. The government has dif-fi culty enforcing this law, however, because businesses can make small changes in their ads to avoid regulation.

If the vitamin advertiser claims only that its supplement will make people “feel younger and more limber,” the advertisement is perfectly legal. The phrase “feel younger and more limber” is so vague that it is diffi cult to prove in court that the claim is false.

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Exaggerated Claims Are LegalExaggerated claims can mislead you yet still be legal. One common practice is to advertise sales with enormous markdowns of 50 percent or more. Claims like this may mean that the business fi rst marked the products way up for one day so it could then mark them down 50 percent and still earn a large profi t.

This practice is legal. To avoid being misled by this gimmick, always compare prices among stores. Don’t assume that a sale is really a sale without checking prices at other stores or on the Internet.

Is It Free?Some advertisements offer gifts to customers who buy a particular prod-uct. Courts have ruled that it is decep-tive to say a gift is free with no further explanation if customers are required to buy something else to receive it.

It is relatively easy to get by this rule. An ad could say all expenses paid instead of free. Or, the advertiser could include an explanation in small print where consumers are not likely to read it.

Suppose a car dealer offers a free trip to Florida to any customer who buys a new car. The ad points out in small print that the “free” trip only in-cludes the price of a hotel and that the cost of transportation and food must be paid by the recipient. As long as complete information is provided, the advertisement is not legally deceptive even if it is diffi cult to understand.

Protecting Yourself from Deceptive AdvertisingTo avoid being deceived by advertising, always use the decision making pro-cess. The decision making process helps you approach buying decisions in an organized, logical manner. It recommends you gather information from several sources so that you don’t make your decision based on an advertisement alone. The process also reminds you to evaluate the information and consider alterna-tive choices.

C H E C K P O I N T

How can you recognize and protect yourself from deceptive advertising?

Which sockis the

KLEEN sock?

Buy the new 25oz. box ofKleen detergent and get

a FREE box of

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UNDERSTAND KEY CONCEPTS 1. Why do businesses advertise?

2. What are brand name products? What are the benefi ts and costs of brands for consumers?

3. How can informative advertising help you make good buying decisions?

4. Who pays for advertising?

5. How does advertising benefi t consumers?

6. What makes an advertisement deceptive?

7. How can using the decision making process help you avoid being misled by deceptive advertising?

THINK CRITICALLY 8. CONSUMER ACTION Revisit this feature on page 28. Emil bought tooth whitening strips that

didn’t live up to their advertising claim. What decision making mistakes did Emil make? On what kind of ad did he base his decision? How would you make a more rational buying decision?

9. What do you think of the advertising that bombards you every day? Does it help or confuse you? Do you believe it is a reliable source of information, or do you just ignore it?

10. How does an advertising jingle contribute to the goal of an ad? Let’s say that you can easily remember the tune but not the name of the product. Would the jingle accomplish its goal?

11. Look at the ad on page 29. What type of advertising is being used? List the characteristics the ad has that indicate what type of advertising it is.


13. Look at the ad on the top of page 31. What type of advertising is being used? List the characteristics the ad has that indicate what type of advertising it is.

14. Look at the table of TV advertising costs. Why might advertisers have been willing to pay much higher prices to place ads during Sunday Night Football or Grey’s Anatomy than for spots they could have purchased on Deal or no Deal or Smallville? What do you suppose these advertising prices are based on? Why?

15. Look at the ad on the bottom of page 31. What type of advertising is being used? List the characteristics the ad has that indicate what type of advertising it is.

16. One of the ads on page 33 is illegal and one is legal. Identify which is which and explain why.


Cost of a 30-Second Major Network Advertisement in 2006–2007

SHOW COST OF A 30-SECOND AD

Sunday Night Football $342,000

Grey’s Anatomy $340,000

Dancing with the Stars $265,000

Deal or No Deal $141,000

Smallville $84,000





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GOALS• Identify ways in which your consumer

decisions aff ect other people.

• Explain why you should use resources responsibly.

KEY TERMglobal warming

CONSUMER ACTIONGretchen lives in Nevada. She is proud of the rose garden she has grown. To keep her fl owers healthy, she waters them every morning. For $3,000, she can buy an underground irrigation system. It would reduce the amount of water she uses by 70 per-cent. What should she consider as she decides whether to purchase this system? How may her choice aff ect other consumers?

Consumers in SocietyAs an American, you have the freedom to make many decisions. You make choices for your own benefi t. But the decisions you make can also have an impact on the lives of others.

For example, consumers who bought women’s hats used to prefer hats with feathers of wild birds as decorations. To meet this consumer demand, hat manufac-turers paid hunters to shoot birds for their feathers. Now, some of those species are extinct. Consumers’ decisions to buy hats with feathers led to the birds’ extinction.

You live in a community that you share with other people. In fact, you live in a worldwide community as well as your local community. Your actions affect other people. Your actions can even affect communities around the globe and, in the future, in space. The best decisions benefi t the world community as well as you and your local community.

Sharing Limited ResourcesSociety can produce only so many goods and services. If a product is in short supply, who should receive the available product? The product will be in demand, D

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and the price will be high. Because wealthy people can pay more for the product, should they be allowed to buy all they want?

During World War II, most of the gasoline the country produced had to be used in the war effort. There wasn’t enough gasoline left for everyone else who wanted to buy it. The government could have allowed the price to increase. In-stead, the government required the price to remain reasonable and limited every-one to three gallons per week. No matter how much money consumers had, they could buy only three gallons per week.

Suppose heating oil is high. Heating oil that one family buys is not available to others. Should wealthy people be able to buy all the oil they want if it forces prices up even more for others? If government keeps oil prices low, will it discour-age additional production and hurt consumers in the long run?

Clean air is a scarce resource, too. Your decision to drive a car or mow your lawn contributes to the pollution in the air. In fact, the pollution in some Ameri-can cities, such as Los Angeles, travels over mountains and pollutes other com-munities. Every day, consumer decisions affect people in other parts of the world.

Protecting Public SafetySociety places limits on individuals’ freedom of choice. The government usu-ally sets these limits, based on community values. Your rights to use your property as you like do not include actions that endanger other people.

Suppose you bought a car that could go 140 miles per hour. It is illegal for you to travel at this speed because it would be unsafe for other drivers as well as for yourself.


What other limits on consumer choice are set by your local or state governments?

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C H E C K P O I N T

How can your consumer choices aff ect the people around you?

Using Natural ResourcesNatural resources are precious and limited. Resources such as oil, coal, natural gas, forests, and plant and animal species take hundreds, thousands, or even mil-lions of years to create. Once used, they cannot be replaced quickly. In some cases, they can’t be replaced at all.

Your consumer choices often involve the use of natural resources. Some people choose to try to reduce the amounts of natural resources they use while others consume as many of them as they are able to buy. Here are some examples of how consumer choices impact natural resources.

Resource Consuming ProductsPart of the American dream is to own a car. In recent years, U.S. consumers have begun to purchase fuel-effi cient hybrid vehicles in ever increasing numbers. Although hybrid vehicles get better mileage than ordinary cars, they are more expensive to buy. On average, in 2008, their initial cost was roughly $4,000 more than similar ordinary vehicles. Consumers who purchase these cars or trucks have to drive them for many years to save enough on gasoline to make up their added cost of purchase.

The extra cost of buying hybrid cars, however, is only one factor consumers may consider. These vehicles use less of the earth’s limited petroleum supply and emit fewer pollutants into the atmosphere. They are generally smaller and cause less wear and tear to our roads. Although these benefi ts do not fl ow directly to the individuals who purchase hybrid cars, they can improve the quality of our environment.

When you make your buying decisions, consider how your choice will impact the earth’s resources. Use resources in modera-tion. Remember, the scarcer the resource, the higher the price in dollars and perhaps on the environment.

WaterIn recent years, the population in southwestern cities, such as Phoenix, Albuquerque, and Las Vegas, has grown rapidly. Many of these com-munities are having trouble supplying all the

In Las Vegas, more than half the water consumed is used for fountains, pools, and outdoor plant-ings. Water conservation has become a top priority as Las Vegas continues to expand.

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water their residents want. An important question is, “How much water do con-sumers really need?”

The southwestern states don’t get much rainfall. Many people there have lawns and gardens that consume thousands of gallons of water each year.

Water is a need. We all need it to live. Yet, most of the water we consume every day we do not really need to live. We use water mostly for wants. Think about your showers or the times you leave the water running in the sink when you are doing something else.

Use water in moderation and don’t pollute it. Water is as important to your wallet as it is to your body. If water were to become very scarce, costs of every-thing from utilities to dining out would skyrocket.

Forest ProductsTrees are used for many consumer products, such as paper, pencils, lumber for building, and furniture. Photosynthesis that occurs in trees absorbs carbon diox-ide from the air and releases oxygen that helps to clean the atmosphere.

In the past 20 years, some of the world’s forests have been destroyed. As a result, thousands of plants and animals that depend on the forests have become endan-gered or extinct.

Forests benefi t everyone, so use their products in moderation. Recycle paper prod-ucts. Used paper and cardboard can be made into other useful products or reused.

The EnvironmentThe environment in which you live affects your health and quality of life. Your decisions can help or harm your environment.

Garbage Americans, as a group, pro-duce more than 1.3 billion pounds of trash each day. Trash buried in landfi lls takes hundreds of years to break down to become part of the soil. Some materials never break down and will remain buried forever.

Trash that isn’t buried is often burned. Burning releases pollutants into the at-mosphere. Burning fuel, such as gasoline, also releases pollutants into the air. Nearly 1.5 billion tons of carbon dioxide are emit-ted from cars and trucks each year in the United States alone. Carbon dioxide in the atmosphere contributes to the problem of global warming: the gradual increase in the earth’s average temperature. Global warming is thought to be a cause of climate change and the potential rise in sea levels as the Earth’s icecaps melt.

Where does the trash you create end up?

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Also, about 16 tons of waste are dumped into our nation’s waterways every minute of every day.

Other Pollutants Some chemicals released into the atmosphere appear to have harmed the earth’s ozone layer—the part of the earth’s atmosphere that protects us from the sun’s rays. Without the ozone layer, humans may get skin cancer at an alarming rate.

Encourage Business ResponsibilityAs a group, you and other consumers have great power to infl uence businesses to operate in socially responsible ways. If many consumers buy more fuel-effi cient cars, then car manufacturers will design cars to be more fuel-effi cient.

You can also encourage businesses to avoid polluting or wasting resources by buying products produced in environmentally responsible ways. Lists of busi-nesses that produce responsibly are available from many sources. One list is the National Green Pages, prepared each year by CO-OP America.

Dispose of Waste ResponsiblyWe all want to live in a clean world, free of disease-causing pollution. You can help by deciding not to pollute any more than necessary in your daily life. Recycle what you can.

Recycling programs reduce the amount of trash discarded into the environ-ment. As a consumer, you can encourage recycling by buying products made from recycled materials.

When you fi nish using products, dispose of them in a responsible way. Many states require businesses that sell potentially hazardous products, such as car bat-teries and motor oil, to accept these used products from consumers and dispose of them properly.

Most communities have special collection programs for hazardous household waste, such as old paint or cleaning products. Contact your local government offi ces for the programs in your area. Never pour solvents or oil down the sink or in the storm sewer.

Obey smog alert instructions. Sometimes your local government may ask you not to put gas in your car or drive in the middle of the day if you can avoid it. Pollutants from burning fuel can disperse more easily in the evening. Your local government may ask you not to mow or water your lawn on certain days to limit pollution and water consumption.

Respect Your Neighbors You live in a world community. What you do affects people around you and sometimes people around the world. Consume responsibly. Conserve. You and consumers like you can save the earth’s limited resources for future generations.

C H E C K P O I N T

What can you do to be a more environmentally responsible consumer?



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UNDERSTAND KEY CONCEPTS



SELECT Now that your group has evaluated your options for the trip, make your decisions. Prepare a presentation to the class. Present your work at each step in the decision making process. Tell the class what you decided to do for each aspect of the trip. Justify your decisions based on the information you gathered.

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1. How do your consumer decisions affect people in your local community and world community?

2. Give three examples of the rights of an individual consumer confl icting with the rights of others in the community.

3. What are some scarce natural resources? What goods and services do you buy that use these resources?

4. What decisions can you make that will conserve natural resources?

5. How can you dispose of waste responsibly?

6. Why is it important to dispose of waste responsibly?

7. How can you encourage businesses to operate more responsibly?

THINK CRITICALLY 8. CONSUMER ACTION Revisit this feature on page 36. Gretchen is trying to decide whether or

not to buy an underground irrigation system. Write a one-page essay identifying the benefi ts and costs of each option. Be sure to identify some opportunity costs. Evaluate how her choice would affect other people in her community. Do you think the benefi ts are worth the costs Gretchen would pay? Explain.

9. What could you do to encourage the government to pass laws that would require people or businesses to be more environmentally responsible?

10. List some consequences to the environment and humans if waste is not disposed of properly. Use a real-life example if possible. Suggest some ways to prevent improper disposal of waste.

11. Call your local government offi ces and fi nd out what programs your community offers for recycling and disposing of hazardous products. Write a short report about what you learn.

12. Using the Internet or your local library, fi nd two laws that require businesses to operate respon-sibly. What do these laws require businesses to do? How do these laws protect you and your community?

13. Suppose a news program reported that a business in your community had been dumping haz-ardous waste in a local river. Write a paragraph on what you would do.





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SummaryDecisions, Decisions 1. As a consumer, you have the power to infl uence how businesses operate. Your decisions are based

on your values. Values are principles—the standards you use to judge what is right and wrong or good and bad.

2. People set goals according to their values. People’s goals include short-term, long-term, and life-span goals. To achieve your life-span goals, you may create a life-span plan that will help you make better choices.

3. Opportunity cost is the value of the next best alternative that you give up when you make a choice.

Make Decisions 4. A decision making process is a logical step-by-step process that will help you make rational buy-

ing decisions. The steps in the decision making process are Specify, Search, Sift, Select, and Study.

Understand Economic Systems 5. Production is the creation of goods and services. To produce goods and services, businesses use

both human and nonhuman resources. Different nations have had various economic systems that include traditional, command, market, or mixed economies.

6. Scarcity exists when consumers’ wants are greater than the resources available to satisfy those wants. Demand is the quantity of a good or service that consumers are willing and able to buy at various prices during a given time period. Supply is the quantity of a product that producers are willing and able to make available for sale at various prices over a given time period. The equilib-rium price for a product is the price at which the quantity supplied exactly equals the quantity demanded of that product.

Consumer’s Role in the Economy 7. A consumer is anyone who buys or uses a good or service. Profi t is the difference between the cost

required to create a product and the money received from selling it. When consumers spend their money, they determine what products will be produced. Competition, a contest among sellers to win customers, forces businesses to serve customers.

Advertising and Consumer Decisions 8. Advertising is done in a variety of ways that includes brand advertising, informative advertising,

comparative advertising, defensive advertising, and persuasive advertising. 9. Puffery is an exaggerated claim made in advertising. If an ad is deliberately misleading, it is

deceptive advertising.

Be a Responsible Consumer 10. The earth’s natural resources are limited and not quickly replaced. To be environmentally respon-

sible, you should use resources in moderation and recycle or conserve them. 11. Dispose of waste responsibly. Consumers may encourage businesses to act responsibly through

their buying decisions.

Chapter 1 Assessment




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Terms ReviewMatch each term on the left with its defi nition on the right.Some terms may not be used.

1. a person who buys or uses a good or service 2. the time between a person’s birth and death 3. the value of the next best alternative that is given up

when a choice is made 4. the price at which the quantity of a product supplied

exactly equals the quantity demanded 5. what businesses use to produce goods and services 6. what a decision making process will help you make 7. a gradual increase in the earth’s temperature 8. a plan to reach long-term goals throughout a person’s

life 9. the quantity of a product that consumers are willing

and able to buy at various prices during a given time period

10. advertisements that include innocent exaggerations 11. the difference between the cost of creating a product

and the income received from selling it 12. something you would like but can live without 13. something you want to accomplish within a year 14. the creation of goods or services 15. the study of how we make use of our resources 16. a standard by which you live

a. advertising b. consumer c. consumer economics d. demand e. economics f. equilibrium price g. global warming h. goal i. life span j. life-span goal k. life-span plan l. long-term goal m. need n. opportunity cost o. production p. profi t q. puffery r. rational buying decision s. resource t. scarcity u. short-term goal v. supply w. value x. want

Consumer Decisions 17. You often disagree with other members of your family about what to watch on television. How

would you decide whether to buy a television of your own for your bedroom? 18. You like a shirt that costs $35. You have the $35 but want to use it to go out next weekend. How

would you decide whether to buy the shirt? 19. You have been offered a job at a community health clinic after school. It doesn’t pay much, but

it would be good experience because you want to be a nurse. If you take the job, you won’t be able to play on your school’s basketball team. How could your life-span plan help you make this decision?



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20. How would you decide whether to drive to work or take the bus? How might your decision affect other people and the environment?

Think Critically 21. You have an old cell phone that only sends and receives messages. You buy minutes over the

Internet for $0.20 each. On average you use 100 minutes per month. You are thinking of sign-ing a two-year cell phone contract that would obligate you to pay a monthly fee of $49 plus $15 in taxes for unlimited use within the United States. If you sign up for this plan, you will receive a new cell phone at no additional cost. This phone will allow you to take and transmit photographs and check your e-mail on line. You estimate that you would have to pay $100 or more to buy a cell phone with these capabilities. Would you sign up for this plan? What would your costs be compared to what you currently pay? What other factors would you consider before making this decision?

22. On one graph, draw a demand curve and a supply curve that represent the demand for and supply of a particular video game. Make the equilibrium price $30 and the equilibrium quantity 500. Suppose the game’s manufacturer just raised the price to $40. On your graph, show what happens to quanti-ties demanded and supplied. Make up numbers as needed. Then write an explanation of what happens and why.

Look It Up 23. Identify a product that has become more popular

recently. Investigate what type of advertising has been created to encourage its sales.

24. Find out what detergent your family often buys. Identify two competing products. Find information about these products and evaluate their quality. Will your family continue to buy the same product?

25. The government has established a rule regarding advertising that may appear on Saturday morning children’s television programs. Find out what the rule is. Does it make sense to you?

26. Investigate laws that have been passed in your community to protect its environment. Do these laws seem reasonable to you? How do they limit individual freedoms?

Which is the Which is the Best Deal?Best Deal?You need to have your house painted. You’ve gotten the estimates below. What is the most it would cost to have Franklin & Sons paint your house? What other factors would you consider? What decision would you make? Explain.

Alternative 1 Paint Unlimited offers to do the job for $2,200, all costs included.

Alternative 2 Franklin & Sons, Inc. will charge $20 per hour plus $14 for each gallon of paint used. Mr. Franklin estimates that it will take 80 to 90 hours and 20 gallons of paint to do the job. He has committed to staying within his estimate.

Alternative 3 Your neighbor’s son has offered to paint your house for $8 an hour, if you provide the paint. He doesn’t know how long it will take him.

Chapter 1 Assessment



POINT YOURBROWSER TO

www.cengage.com/pfi nance/millerComplete the activity for Chapter 1.

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Inside the Numbers 27. More than 300 million people live in the United States. Each person, on average, produces

4.4 pounds of trash every day. How much trash is produced in the United States in a year? Nearly 30 percent of this trash is recycled. If we could increase this to 40 percent, how much less trash would we discard? What would Americans have to do to accomplish this recycling goal?

28. Suppose you were offered two different summer jobs. One is working at a concession stand at a ball-park. It would pay $8 per hour for 20 hours per week. The other job is a sales associate at a clothing store. That job pays $7 per hour for only 16 hours a week, but it also pays a 5 percent commission on any sales you make. You think you could sell $100 worth of clothing each hour. Which job would you take to earn the most income possible? What other factors should you consider when you choose?

Make Academic Connections 29. ENGLISH Upton Sinclair wrote The Jungle soon after 1900. In this book, he described unhealthy

conditions in the meat-packing industry. This book led to the passage of the Pure Food and Drugs Act in 1906. Find Sinclair’s book in a library and read it. What did the book reveal that infl uenced the government to pass a law requiring food manufacturers to operate more responsibly?

30. SCIENCE Many different types of scientists are involved in working to recycle the products we use. Look on the In-ternet to fi nd two job descriptions for scientists that work with recycled products. What do they do? What classes did they have to take to prepare for their careers?

31. COMMUNICATE Write a paragraph that identifi es your most important values, goals, hopes, and dreams. Why is it useful to keep these things in mind when making decisions? What are some possible consequences of losing sight of them?

WHAT DO YOU KNOW NOW?

32. How do consumer decisions infl uence the products that are produced and the prices at which they are sold?

33. How may advertising be used by consumers to help them make better decisions?



STUDY After your presentation, ask the class to identify something that could go wrong on your trip. Then use the information you have already gathered to describe a way around this problem so that your trip will be a success.

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