Chapter 3Your Purchasing Power

What Is Inflation?• The price is the amount a buyer pays for a good or service. • Inflation is an increase in the general level of prices for goods and

services. • Inflation reflects how much prices are rising. When prices are

rising faster than income, buyers lose purchasing power.

Measuring Inflation• Inflation is measured by the U.S. government. The

measurement tool used is called the Consumer Price Index (CPI). • The CPI uses a list of goods and services that are commonly

bought by consumers. The index measures changes in price from a base or starting point in time to the current time (or time of measurement).

Inflation vs Purchasing Power

As inflation rises, the true purchasing power of each

dollar falls

Many people receive annual cost-of-living

adjustments (COLAs) or pay increases from their

employers to keep pace with inflation.

TYPES

DISINFLATION

REFLATION

HYPERINFLATION

DEFLATION

DEMAND-PULL INFLATION

• Demand-pull inflation results in higher prices because consumers want to buy more goods and services than producers supply

COST-PUSH INFLATION

• Cost-push inflation occurs when producers raise prices because their costs to create products are rising • Cost-push inflation is affected by productivity.

REAL-COST INFLATION

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

INFLATION AFFECTS EMPLOYMENT

Rising Prices

IncreasedDemand

More Spending

More Producing

Higher Employment

INFLATION AFFECTS SPENDING, SAVING, AND INVESTING

• In times of rising prices, consumers may have to use more of their disposable income to buy needed goods and services. Less money may be available for saving.• The time value of money is a concept that says a dollar

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

COST-RECOVERY PRICING

• In some cases, the business has invested large sums of money to develop a new product. Research and development (R&D) costs can be in the millions or even billions of dollars. Thus, when a product is first introduced, the price will be set high in order to recover the R&D costs. This is known as cost-recovery pricing . Because the price is high, it will invite competition, often in the form of generics, which are inexpensive substitutes.

COST-PLUS PRICING

• Another way that sellers set prices is called cost-plus pricing , which involves computing the per-unit cost of producing a product and then adding a percentage of that amount, called a markup , to obtain the price. The markup is also called the profit margin or gross profit. • Using this method ensures that the company will make

a certain profit if the product sells successfully. An example of cost-plus pricing for a piece of furniture is shown below.

VALUE-BASED PRICING

• value-based pricing , the seller tries to determine how much consumers are willing to pay for the product. In other words, it will be sold for the highest price that the market (consumers) will bear.

MARKET-BASED PRICING

• market-based pricing , the price is set to be competitive with prices of similar products currently being sold. • The marketing mix is the group of products or services

offered for sale by a business at any point in time. Clearly, what customers want (and are willing to pay to get it) will influence the products offered by sellers.

• Sellers who have a similar product to others may try to market their product as different from or better than the other products. This strategy is known as product differentiation.

How Do Buying Strategies Affect Prices?

• Rational buying is the process of selecting goods and services based on need, want, and logical choices. • emotional buying is the process of purchasing products

based on desire rather than logic. • Impulse buying happens when people buy something on

the spur of the moment without thinking it through or planning the purchase.• Emotional and impulse buying often lead to buyer's

remorse, when you later realize that you made a poor buying decision.

Buying Strategies

ECONOMIZING OPTIMIZING

Selling Strategies

Meeting Demand

• Convenience• Customer Service• The Right Product and Price

Creating Demand

(Advertising)

• Newspaper and Magazine Advertising• Television and Radio• Internet• Billboards, Signs, Circulars, Brochures, • Direct Advertising• Customer Loyalty Programs

Consumer Strategies

• Before:• Prepare a shopping list.

• While• Do not let a salesperson influence you.• Stick to your list and avoid impulse buying.• Shop when you are most alert.• Comparison shop among several sellers.

• After• Keep receipts, warranties, and packaging.

What Are Consumer Rights?• Consumer Bill of Rights• Airline Passenger Rights• Consumer Technology Bill of Rights• Patients Bill of Rights

Laws Defining Consumer Rights• The Consumer Bill of Rights• One of the most important steps toward consumer protection was

the Consumer Bill of Rights of 1962. It grants consumers the following rights:

• right to safety from unsafe products• right to be informed of the facts necessary to make good choices• right to choose amongst a variety of quality products at

competitive prices• right to be heard to ensure consumer interests are represented

when laws are being written and enforced• right to redress in the form of compensation for complaints and

injuries• right to consumer education in the form of programs and

information that will help consumers make better decisions

Airline Passenger Rights• In 1999, it became apparent that airline passengers were

being treated unfairly. A new law was passed to guarantee the following:

• Confirmed reservations. When you have a confirmed reservation, you will be provided a seat on the flight.

• Refunds. When a ticket is cancelled, you will be issued a refund. If the ticket is nonrefundable, you can apply the fare to a future flight.

• Compensation for hardships. If delays, cancellations, or “bumps” due to a flight being oversold occur, compensation is required.

Consumer Technology Bill of Rights

• As a result of the widespread use of computers, new rights were passed to protect consumers as follows:

• Time-shifting. Consumers have the right to time-shift. You are time-shifting when you record video or audio for later viewing or listening.

• Space-shifting. Consumers have the right to use content in different places. Space-shifting allows you to copy the contents of a CD or other media to a portable or other device for personal, not commercial, purposes.

• Backup copies. You are allowed to make backup copies of purchased CDs, DVDs, and other media in case they are destroyed.

• Platform of choice. You are allowed to listen to music on whatever device you choose. For example, you can use your MP3, iPod, iMax, or Linux.

• Translation. You can translate legally acquired content into a format that makes it more usable to you. For example, a blind person can modify an electronic book so it can be read out loud.

Patients' Bill of Rights• Between 1998 and 2001, abuses in managed care and other related

medical services led to the following rights:• Informed disclosure. You have the right to receive accurate, easily

understood information so you can make informed health care decisions.• Choice of providers. You have the right to choose your own doctor and

other health care provider.• Access to emergency services. You have the right to access emergency

services when and where the need arises. The health plan insurer must pay for the cost of that service and cannot insist you use a provider on its restricted list.

• Treatment decisions. You have the right to participate in all decisions related to your health care.

• Respect and nondiscrimination. You have the right to considerate, respectful care from all health care providers.

• Confidentiality. You have the right to confidentiality regarding your health care information.

Consumer Protection Law• Food, Drug, and Cosmetic Act of 1938• Hazardous Substances Act of 1960• Kefauver-Harris Drug Amendment of 1962• Cigarette Labeling and Advertising Act of 1965• National Traffic and Motor Vehicle Safety Act of 1966• Care Labeling Rule of 1971• Nutrition Labeling and Education Act of 1990• Family Educational Rights and Privacy Act (FERPA) of 1974 • Health Insurance Portability and Accountability Act (HIPAA)

of 1996

Consumer Protection

•Federal Agencies• U.S. Department of Agriculture (USDA)• Food and Drug Administration (FDA)• Consumer Product Safety Commission (CPSC)• Federal Communications Commission (FCC)• Federal Trade Commission (FTC)Federal Aviation

Administration (FAA)Securities and Exchange Commission (SEC).

Private Organizations

• The Better Business Bureau (BBB)• The Major Appliance Consumer Action Panel (MACAP)• The National Consumers League (NCL)• Consumers Union (CU)• Consumer Reports• Buying Guide

Fraud and Schemes• BAIT AND SWITCH• FAKE SALES• LOW-BALLING• PYRAMID SCHEMES• PONZI SCHEMES• PIGEON DROP• FRAUDULENT REPRESENTATION• HEALTH AND MEDICAL PRODUCT FRAUDS• INFOMERCIALS

How Can Consumers Protect Themselves from Fraud?

• Shop smart• Be aware of prices• Understand sale terminology• Compute unit prices• Read labels• Check packages carefully• Read contracts• Keep receipts and warranties• Compute total cost• Research businesses