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Part II MICROECONOMIC TOPICS


4 Consumer Power and Behavior

Consumers represent the basic consumption unit in the economy. In 2013 there were 316 million consumers in the United States. Over time consumers have struggled for their rights. Consumerists at the local, national, and international levels work to improve the conditions under which consumers make consumption choices. Significant support for consumer rights also comes from the government and international organizations. Consumers' buying decisions are influenced by many factors, including the perceived utility of goods, personal income, the availability of substitutes, and other measures of consumer well-being. Issues related to consumer behavior include the responsible use of credit, participation in consumer cooperatives, and the value of sustainable consumption.

CONSUMER RIGHTS AND PROTECTIONS

Consumers buy goods and services to satisfy personal wants or needs. Consumers are sometimes referred to as households. Consumers represent the demand side of a market. Producers, on the other hand, make or sell goods and services to earn profits. Producers are often called businesses or firms. Producers represent the supply side of a market. Combined, consumers and producers comprise the private sector of the economy. Decentralized private sector decision making by consumers and producers is a foundation of the American economy.

Consumers in the U.S. Economy

People's consumption of goods and services is directly related to their household income. In 2012, $13.4 trillion in income poured into American households. This income represents income from all sources, minus the mandatory payroll taxes for various social insurances. Income is divided into two broad categories: earned income and transfer payments. Earned income is the money generated by individuals in exchange for their work effort or their investments. Most earned income in the American economy is derived from wages and salaries, interest and dividend payments, and proprietors' profits. Transfer payments, on the other hand, are payments of money, goods, or services that are financed with tax dollars and distributed to groups that do not offer productive services in return. The largest government transfer program in the American economy is Social Security, a social

Table 4.1 Sources of Household Income, 2012

Income Sources[1]

Income ($ billions)

Income (%)

Wages and salaries

8,566

59.7

Proprietors' income

1,202

8.4

Rental income

463

3.2

Interest and dividends

1,750

12.2

Transfer payments

2,375

16.5

Source: U.S. Department of Commerce, Bureau of Economic Analysis, “Table 2: Personal Income and Its Disposition,” News Release, March 29, 2013.

insurance program mainly for the nation's elderly. Other transfer payments offer income or other assistance to the poor, the unemployed, and others in need. Table 4.1 shows the sources of income before social insurance payments are deducted.[2]

Households often have multiple sources of income, perhaps a wage or salary collected from a job, interest from a savings account, and dividends from stocks. Even after taxes and social insurance contributions were deducted from household income, Americans' total disposable personal income in 2012 was $11.9 trillion, of which 96.1 percent was spent and 3.9 percent was saved.[3]

Consumer spending drives most economic activity in the American economy. During the 12 month period between July 2011 and June 2012 the average American household spent $50,631 on consumer goods and services. Over the years housing has been the largest category of consumer spending. Housing includes mortgage or rent payments, utilities, furniture and appliances, and other household needs. In 2011–2012 housing accounted for about one-third of consumer spending. Other major categories of consumer spending included transportation, food, and insurances and pensions. Table 4.2 shows the average consumer expenditures for a typical household in 2011–2012.[4]

Consumer spending on final goods and services is the largest component of spending in the U.S. gross domestic product (GDP). The GDP is the nation's most reliable measurement of total output of goods and services in a given year. The GDP is calculated by adding spending on consumer goods, investment goods, and government goods, and then adjusting this total by the value of net exports. In 2012 the U.S. GDP stood at $15.7 trillion after these adjustments were made. In this same year consumers spent more than $11 trillion

Table 4.2 Annual Consumption Expenditures for a Typical Household, 2011–2012

Household Spending

Categories of Spending

Dollar Amount

Percentage of Total Spending

Insurance and pensions

5,565

11.0

Food

6,532

12.9

Transportation

8,505

16.8

Housing

16,940

33.5

Other

13,089

25.8

Source: U.S. Department of Labor, Bureau of Labor Statistics, “Table A: Consumer Expenditures Midyear Update, July 2011 through June 2012 Average,” News Release, March 27, 2013.

on goods and services, which accounted for more than two-thirds of the GDP. Nearly one-third of all U.S. spending was on investment goods and government goods.[5]

Because consumer spending represents more than two-thirds of all expenditures in the American economy, consumers' willingness and ability to purchase products is vital to the nation's economic health. When people's income rises, and people feel more confident about spending money, aggregate demand tends to rise. Aggregate demand is the total demand for goods and services in an economy. An increase in aggregate demand stimulates economic activity and thus contributes to prosperity. When people's income and confidence fall, however, aggregate demand likewise falls. Sagging consumer demand discourages production and investment, and contributes to economic downturns.

Consumer behavior in the American economy is influenced by present economic conditions and by expectations of future economic conditions. One of the most recognized gauges of consumer confidence is the Consumer Confidence Index (CCI). The Conference Board, a respected nonprofit economic research organization, publishes the CCI every month. The CCI reports on consumers' attitudes and buying intentions, which, in turn, influences business decisions concerning production, hiring, and so on. A second recognized gauge of consumer confidence, the University of Michigan's Consumer Sentiment Index, also shows the ups and downs of consumer confidence in the U.S. economy.

Consumer confidence can swing rapidly in the American economy in response to national or international events. For instance, in 2007–2009 the U.S. economy dipped into a serious recession. Economic conditions during this recession included a significant number of business failures, a decline in GDP, a rapid increase in the unemployment rate, and the specter of financial collapse. These dismal economic conditions caused a steep

Consumer spending is influenced by positive or negative economic conditions

Consumer spending is influenced by positive or negative economic conditions.

decline in the CCI from 112.6 in July 2007 to just 25.3 in February 2009. Four years later, in March 2013, the CCI had rebounded some to 59.7. This modest rebound was buoyed by improvements in the performance of the U.S. economy, which included positive growth in the GDP and a drop in the unemployment rate. The CCI was still low by historical standards, however, reflecting some consumer apprehension about economic conditions. For instance, the CCI in 2013 was just 59.7 compared to the CCI in the base year (1985), when it was set at 100.[6] The University of Michigan's Consumer Sentiment Index noted similar declines in consumer confidence during 2008 and 2009 and a slow, irregular assent from despair since this time.[7]

  • [1] Income prior to deductions for social insurances; wages include employer contributions for pensions and social insurances.
  • [2] U.S. Department of Commerce (DOC), Bureau of Economic Analysis (BEA), “Table 2.1: Personal Income and Its Disposition,” News Release, March 29, 2013
  • [3] Ibid.
  • [4] U.S. Department of Labor (DOL), Bureau of Labor Statistics (BLS), “Table A: Average Expenditures and Characteristics of All Consumer Units and Percent Changes, 2010 through June 2012,” News Release, Consumer Expenditures Midyear Update, July 2011 through June 2012 Average, March 27, 2013
  • [5] DOC/BEA, “Table 3: Gross Domestic Product and Related Measures; Level Changes from Preceding Period,” News Release, March 28, 2013
  • [6] Conference Board, “The Conference Board Consumer Confidence Index Declines in March,” News Release, March 26, 2013
  • [7] Thomson Reuters and the University of Michigan, “Consumer Confidence Higher Due to Job Gains,” Survey of Consumers, January 27, 2012, 1.
 
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