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Earning and Spending: The Consumer Chapter 5 What determines INCOME? Wages or Salaries Payments for labor services Rent Payment for use of land Interest Payment for the use of capital Profits Residual payment to entrepreneurs SPECIAL NOTE: Relationship between CAPITAL and LABOR Substitute Complement Capital Influences on Labor Substitute: When more capital is brought in, less labor is needed. Worker for a robot. Capital Influences on Labor Complementary Increases in the use of capital causes an increase in labor. Get more computers for LPS – need more techs to maintain. ANOTHER Special Note: Special characteristics of rent and the relationship to limited supply Special characteristics of RENT Rent is the payment for a factor that has perfectly inelastic supply. Level of rent depends ENTIRELY on the demand. More Types of Elasticity Perfectly elastic Quantity demanded changes from zero to infinity when there is a price change. More types of Elasticity Relatively elastic Refers to the demand condition in which the percentage change in quantity is GREATER than the percentage change in price. Even More Types of Elasticity?? Unitary Elasticity Demand condition where the change in price is equal to the change in quantity. Yes! Even more types of elasticity! Relatively Inelastic – Demand condition where the percentage change in quantity is SMALLER than the percentage change in price. And for a finale ….. Perfectly inelastic Demand condition in which there is no change in the quantity demanded when the price changes. Equation to calculate elasticity Q2 – Q1 / Q1 ______________ P2 – P1 / P1 Consumer Sovereignty decides allocation of resources IF consumers decide what goods and services they spend their money on. THEN, it makes it profitable for entrepreneurs to produce those goods and services AND acquire the resources to produce them. SO Consumers decide allocation. Consumer “lingo” in Economics Average Propensity to Consume Percentage after tax income available to spend on goods and services. Average Propensity to Save Percentage after tax income available to save. Question to ponder? Why is it important to know the APC and APS for people? What country to you think has the highest APC? CHINA! Chinese buy more televisions and refrigerators than Americans The number of computers Chinese buy DOUBLES every 28 months Interested in more about APC and APS? Stay tuned for more details! How can consumers make better choices? Information Advertising Where do we get information? Product reputation Brand names Government standards and testing advertising Advertising Types Noninformative Repetitive Deceptive Can reduce consumer utility by raising the prices of goods and services and by distorting decision making. Why do you make the decisions you do on what to buy? Veblen Effect conspicuous consumption / status seeking Snob Effect Preference for buying goes down as # people buying goes up. Bandwagon Effect Joining the crowd