Role of Consumers in a Free Enterprise System

1. Role of Consumers in a Free Enterprise System Chapter #6

2. Our Free Enterprise System Section #6.1

3. Section Goals • Discuss the basic characteristics of the marketplace. • List and describe the three basic components of a free enterprise system.

4. Characteristics of the Marketplace • In the United States, we live in a free enterprise system. • Free Enterprise: • An economic system in which producers and consumers are free to engage in business transactions with minimal government interference. • Producers: • The manufacturers or makers of goods and services for sale. • Consumers: • The buyers and users of goods and services. • A country’s economic system determines what the limited resources will be used to produce.

5. Scarcity • All economies face the problem of scarcity, because resources are limited but consumers wants are not. • Scarcity: • Limited resources for producing the products to satisfy the wants of consumers. • In a free enterprise system, consumers determine what products will be produced and at what prices. • To make a profit, producers must provide products consumers will buy.

6. Supply and Demand • The interaction of supply and demand determine what will be produced, in what quantities, and at what prices. • Supply: • The quantity of goods and services that producers are willing and able to provide. • Demand: • The willingness and ability of consumers to purchase goods and services at certain prices.

7. How Supply and Demand Works • The supply and demand system: • Increased demand creates a situation in which the supply of the product is not sufficient to satisfy all consumers who want to buy it. • The high prices bring large profits to producers. • Large profits prompt current producers to make more of the product and attract other producers to start providing the product, increasing supply. • Supply exceeds demand, and consumers can pick and choose. • Reducing prices, in turn, lowers profits, and producers begin to produce less. • Eventually, the product reaches the equilibrium price. • Equilibrium Price: • The price at which the quantity supplied equals the quantity demanded of the product.

8. Consumer vs. Producer Power • Consumers have the ultimate power in a free enterprise system because they determine what is produced and at what price. • Producers have the power to influence buying decisions through advertising and other marketing strategies.

9. Parts of a Free Enterprise System • To function smoothly, a free enterprise economy needs: • Competition: • The rivalry among sellers in the same market to win customers. • Monopoly: • A market with many buyers but only one seller. • Price-Fixing: • An illegal agreement among competitors to sell a good or service for a set price. • Purchasing Power: • The value of money, measured in the amount of goods and services that it can buy. • Transfer Payments: • Government grants to some citizens paid with money collected from other citizens, generally through taxes. • Informed Consumers

10. Consumer Problems Section #6.2

11. Section Goals • Describe deceptive practices used to defraud consumers. • Discuss how to be a responsible consumer.

12. Fraudulent and Deceptive Marketing Practices • The following practices all consumers should be aware of to protect themselves: • Bait-and-Switch • Fake Sales • Low-Balling • Pyramid Schemes • Pigeon Drop • Fraudulent Representation • Health and Medical Product Frauds • Infomercials • Internet Fraud • Telemarketing Fraud

13. Bait-and Switch • Bait-and-Switch schemes lure customers into the store with advertised bargains. Then salespeople try to switch customers to a more expensive product. • Bait-and-Switch: • An illegal sales technique in which a seller advertises a product with the intention of persuading consumes to buy a more expensive product.

14. Fake Sales • Fake sales make customers think prices are reduced when they really aren’t. • Fake Sale: • When a merchant advertises a big sale but keeps the items at regular price or makes the price tags look like a price reduction when there actually is none.

15. Low-Balling • Low-balling repair shops offer a repair at a low price, and then discover several other “necessary” services. • Low-Balling: • Advertising a service at an unusually low price to lure customers, and then attempting to persuade them that they need additional services.

16. Pyramid Schemes • Pyramid schemes depend on recruiting multiple levels of distributors. • Pyramid Scheme: • Illegal multilevel marketing plans that promise distributors commissions from their own sales and those of other distributors they recruit.

17. Being a Responsible Consumer • In order to be a responsible consumer, do the following: • Identify deceptive practices • Shop smart • Stay informed • Seek redress • Redress: • A remedy to a problem.

18. Shopping Smart • Understand sale terminology • Avoid impulse buying • Plan your purchases • Compute unit prices • Read labels • Check containers carefully • Read contracts • Keep receipts and warranties • Compute total cost • Ask for references • Be loyal • Check up on businesses • Wait a day for major purchases.

19. Staying Informed • Become familiar with sources of information on goods and services. • Read warranties and guarantees. • Read and understand care instructions before using a product. • Analyze advertisements about products before buying. • Know the protections offered by consumer protection laws. • Inform appropriate consumer protection agencies of fraudulent or unsafe performance of products and services. • Report wants, likes, and dislikes as well as suggested improvements and complaints to retailers and manufacturers.

20. Bibliography • Ryan, J.S. (2006). “Managing your personal finances; 5th ed.” Thomson South-Western; Mason, Ohio.