Your Role as a Consumer

Disposable and Discretionary Income

• Disposable– Income a person has left after all taxes have

been paid–Used to buy necessities

• Discretionary Income– Leftover income which can be saved or spent

on luxury items or entertainment

Factors impacting Earning Power

• Education• Occupation• Experience• Health• Location

Decision Making

• First decision–Whether to buy an item or not•Do you need the item?•Did you consider the trade-offs

involved

Deciding on the Right Purchase• Scarce Resources– Income and time

• Opportunity costs–Value of highest alternative choice you didn’t

make• Quality of goods–High quality = high cost– Low quality = low cost

• Rational Choice–Alternative that has the greatest

perceived value–Choosing the best-quality item that is

least expensive from among comparable-quality goods

Buying Principles or Strategies

• Three basic buying principles–Gathering Information–Using Advertising Wisely–Comparison Shopping

Gathering Information

• Can be costly because it involves time–Value of time and effort spent

gathering information should not be greater than the value you receive from making the best choice of product for yourself

Using Advertising Wisely • Competitive Advertising–Attempts to persuade consumers that a

product s different from and superior to any other–Purpose is to take customers away from

competitors

• Informative Advertising–Benefits consumers by giving

information about a product• Existence of product• Price• Quality• Special features

Bait and Switch• Deceptive advertising• Bait–Advertised item at an unrealistically low

price•Unavailable when you get to the store

• Switch–Salesperson shows you more

expensive model–Points out all the better features

• Illegal practice

Comparison advertising

• Getting information on the types and prices of products available from different stores or companies

• Things to consider–Warranties•Promise made by manufacturer or

seller to repair or replace products within a certain time period if it is faulty

–Brand-Name vs Generic products

Going into Debt

What is Credit?

• Receiving of funds either directly or indirectly to buy goods and services today with the promise to pay for them in the future

• Amount owed = principal + interest–Principal is amount originally borrowed–Interest is amount borrower must pay

for use of someone else’s $

• When you receive credit, you are borrowing funds and going into debt

• Taking a loan is the same as credit–You must pay interest for the use of

someone else’s purchasing power - $

Installment Debt

• Loan repaid with equal payments, or installments, over a period of time–36 equal payments over 36 months

• Durable goods–Manufactured items that last longer

than three years• Cash

• Payments depend on size of loan and length of installment period–Longer repayment period means

smaller payments–Trade-off is greater interest charged

Mortgages

• Largest form of installment debt• $ owed on real property–Houses, buildings, land

• People consider this a necessary payment–Not like other debt

Why people use Credit

• People believe they require goods immediately–Don’t want to wait

• Spread payments over the life of the item purchased–Car or truck

Charge Accounts• Credit extended to a consumer allowing

them to buy goods or services from a particular company and pay for them later

• Regular charge accounts–30-day charge–Credit limit–Must be paid at the end of period–If not paid in full, interest is charged

• Revolving Charge Account–Make additional purchases even if you

havent paid in full–20% of bill each month

• Installment Charge Account–Equal payments spread over time

Credit Cards

• Allows a person to make purchases without paying cash

• Can be used at many kinds of stores, restaurants, hotels, and other businesses

• Visa, MasterCard and some banks

Applying for Credit

• Creditworthiness–Fill out credit application–Credit bureau will perform a credit

check• Income•Current debts•Details about personal life•How well you repaid past debts

Credit Rating

• Rating of the risk involved in lending money to a person or business

• Good, Average, or Poor ratings–Determined by multiple factors•Capacity to pay•Character•Collateral you might have

• Secured Loans–Loan backed by collateral–If loan isn’t repaid lender gets to take

collateral• Unsecured loans–Loan guaranteed by promise to repay it–Usually requires a cosigner•Promise to repay loan if borrower

cannot