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Chapter 10 Consumption and Savings Economics 11. What is consumption? consumption is that part of an individual’s income that is spent on goods and services.

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Presentation on theme: "Chapter 10 Consumption and Savings Economics 11. What is consumption? consumption is that part of an individual’s income that is spent on goods and services."— Presentation transcript:

1 Chapter 10 Consumption and Savings Economics 11

2 What is consumption? consumption is that part of an individual’s income that is spent on goods and services rather than saved

3 in our economy, consumer purchases indicate to producers what to produce and what not to produce  producers supplying goods and services in high demand are likely to make profits, those producers that don’t will probably suffer losses

4 through the individual decisions of millions of consumers acting through the market system, producers are led to produce what consumers want, when and where they want it

5 in the market system, individuals who are poor have much less influence on what is produced than those who are wealthy the poor have fewer dollar votes to influence production compared to the rich who have a lot of dollar votes

6 at any point in time, when we buy one thing rather than another, we are voting for the production of one thing rather than the production of another the collective influence of consumers – called demand – is of paramount importance in influencing what producers will produce

7 Factors influencing consumer choice:  must meet both needs and budget  different preferences  trends  customs  advertising  amount of income

8 Consumer Protection besides needing guidance to judge the merits of products, consumers need protection for example the federal government enforces the standards of weights and measures so that when you visit the gas pump or the corner store, you will be reasonably sure you will get a fair measure cmc.nsf/eng/home cmc.nsf/eng/home

9 Consumer Protection restaurants are inspected for ensuring food safety standards cleanliness codes are being followed t/regulations/regs/Hpafd saf.htm t/regulations/regs/Hpafd saf.htm

10 Consumer Protection business itself has moved to protect consumers from “shady” operators all Canadian cities have Better Business Bureau offices financed by businesses in the community

11 Consumer Protection there is also the Canadian Association of Consumers that provides consumers with information on many products

12 Consumer Credit consumer credit is the ability to acquire goods and services now in exchange for payments in the future

13 Consumer Credit advantages of buying on credit: we can buy durable goods and have the use of them immediately instead of waiting to save the total amount needed without credit most people could not afford to buy a home credit can help with financial emergencies credit permits us to take advantage of sales when we don’t have cash available

14 Consumer Credit disadvantages of buying on credit: must pay a rate of interest on all money borrowed because credit makes purchasing easy, people often get into debt, and sometimes lose the items purchased on credit bad credit can cause banks to be unwilling to loan money

15 Consumer Credit the interest you pay is the cost of borrowing  before borrowing you should comparison shop for interest rates

16 Consumer Credit other sources of credit:  utility bills (get the service before you actually pay for it)  phone companies bill ahead

17 Credit Cards credit card holders are billed monthly for their expenditures if payment is received within a specified time limit, there can be no interest charges - beyond that time limit, the interest charges are high, usually 18-22%

18 Budget A budget is a financial plan that shows the expected income and expenditures

19 Savings Savings are the part of the income that is not spent There are two broad categories of places to put your savings – loans or equities

20 Using savings to loan When you loan money to a bank or another institution, you earn a rate of interest until your loan is returned to you There are two ways to do this, through 1.) banks or through the 2.) government

21 Using savings to loan 1.) banks Personal Chequing Account (good for paying bills, usually a really low interest rate) Savings Account (higher rate of interest) Guaranteed Investment Certificate – you get a GIC for a specified amount of money for a fixed period of time (highest rate of interest)

22 Using savings to loan 2.) government Buy a Canada Savings Bond These bonds are issued for a period of time specified by the government of Canada (usually pay an interest rate higher than savings accounts)

23 Using savings to loan You can also invest your savings in corporations by becoming a bondholder Corporate bonds are more risky than government bonds but pay a higher rate of interest

24 EQUITY Equity investments are investments in those things that we can see or touch The most common forms of equity investments are in homes and cottages (real estate) and in the common stocks of corporations

25 Equity – common stocks Common stocks are the riskiest form of investment in a corporation because they have last claim on the earnings of the company Common stock is likely to have a higher rate of return than preferred stock or bonds

26 Equity – Real Estate When people borrow money to buy a house the loan is called a mortgage mortgage – money borrowed from a financial institution or trust company that is used to buy a home

27 Equity – Real Estate One of the principal reasons for buying a home is to build up savings Repayments of a mortgage are often fixed for the life of the loan so they are predictable over that period of time

28 Equity – Real Estate In most mortgages, part of the monthly (or biweekly) payment goes toward paying off the mortgage (the principal) So as time goes by, the homeowner’s equity in the house will gradually increase HOME EQUITY = the value of the house subtract the value of loans on it

29 Why rent then? Though there are many advantages to homeownership as a savings investment, there are also advantages of renting: The renter is free from the day to day upkeep of the home The renter doesn’t have to worry about declining house prices or rising interest rates The renter is mobile, at the end of a lease, they are free to move without the worry, hassle and expense of selling a house

30 Mutual (investment) funds Essentially there are five different kinds of mutual funds: 1)Equity funds – money is invested in stock 2)Bond funds – money is invested in government bonds and corporate bonds

31 Mutual (investment) funds 3) Mortgage funds – money is invested in mortgages 4) Money market funds – money is invested in short-term (3-6months) government bonds 5) Balanced funds – money is invested in a mix of equities

32 Life Insurance We all know we are going to die but we don’t know when, to help deal with that uncertainty, we have life insurance Insurance is a contract in which one party (the insurer) agrees to pay another (the insured) a sum of money in the event of a specific loss  in return the insured makes payments to the insurer

33 Life Insurance People purchase life insurance for the sake of their family, in case the principal breadwinner dies, the life insurance money should protect the family against losing house, car, etc.

34 Life Insurance HOW LIFE INSURANCE WORKS: The risk of financial loss due to death can be shared among a large number of people Each insured individual makes a payment (premium) to an insurance company In the event of the death of the insured, the company makes the payment to an individual (the beneficiary) chosen by the insured

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