What's the basic purpose of any economic system?
- How do you exchange goods and services?
- Ex: Gilligan's Island; worked out how they survived
What are the 3 questions any economic system must answer?
- -What to produce?
- -How much do we need?
- -For whom? Who's going to buy this? Do we have a market for it?
Who are the 3 entities that can answer the above questions? In the U.S., who answers these questions?
- - Consumers (buyers; answer without influence)
- - Producers
What's the difference between an economic system that's classified as a "Market System" vs. a systems classified as "Central Planning"? How is the U.S. classified?
Central Planning: Must get approval from government before getting more products; shortages are an issue; have gov. regulations because businesses didn't do their jobs; gov. answers the questions; tells businesses what & how much to produce.
Market System: Consumers; king of marketplace; good consumers; consumers answer the question
What does Consumer Sovereignty mean?
- -Idea that meeting consumer's needs is the primary function of the economy.
- -Consumer ("ruler") guides the economy so goods & services they want will be produced.
- -Consumer decisions are considered valid
How does competition affect the price of a product?
More competition= lower prices
1st prez to say all consumers have basic rights
Right to be Informed:
- -What's in the product
- -Side effects
- -Being charged
- -Terms of contract
- -Return policy
Right to Safety:
- -Costs go along with safety
- -Use responsibly
- -Protected against hazardous goods
- (Ex: cars must be made safe to protect us)
Right to Choose:
- -Right to "competition"
- -$$$ will decrease
- -Assured access to variety of products at competitive prices
Right to be Heard:
- -By the gov't
- -Let them know what we want
- -By the companies
Right to decent environment
Right to Consumer Education
- Right to Redress
- -1970's: what are my rights after buying the product (Nixon)
What are Consumer Responsibilities important? What problems might we encounter while trying to fulfill them?
- To be aware of role & function in economy
- To perform role effectively (to be alert, informed, responsible consumer; to exercise independence of judgement & action)
- To avoid wasting resources
- To avoid exploitation of workers
- To be honest in dealings
- To protest when appropriate
- To communicate with producers & businesses
- To accept consequences of consumer decisions
- To report defective goods to both the seller & manufacturer
What's the purpose of advertising?
- Designed to appeal to our emotions
- Can provide good information
- Lets consumers know about new products
- Can inform consumers about new uses for products
- Reduces costs of magazines, newspapers, TV & internet
Who ultimately pays for advertising? How?
- We pay for advertising by purchasing the product.
- Giving them more $$$ for advertising
Top 10 national advertisers primarily could be categorized as what type of business?
What are 3 categories/classifications of ads? What type of ads are seen most frequently?
- Informative: informs consumers about the product they're selling. (Ads: 3; Consumers 1)
- Comparative: Compare by name. (Ads: 2 Consumers:2)
- Defensive/Competitive: Brand name recognition (Ads: 2 Consumers: 1)
Do ads stimulate competition or reduce competition (national vs. local level)?
- National: Reduce competition (oligopoly)
- Local: Stimulate competition (cause of different market structure)
Discuss the relationship of advertisers and the "content" of the media in which they are advertising.
Advertisers have a lot of influence & control over the media in which they advertise
Name some deceptive advertising and be able to explain why they may be deceptive
- Sins of Omission: Leave out critical info
- Misleading Statements: "sale" (could've marked up the price & then called it a better "sale")
What is "bait & switch" advertising? Legal or illegal?
- Advertising a low price on an ad & then trying to get the consumer to spend more $$ on something that's considered to be a "better deal".
What is "puffery"? Legal or illegal?
- "Hot air" in the ad
- Making it seem better than it really is
- (Ex: Built Ford Tough)
Which fed agency has control over advertising?
Federal Trade Commission
What power does the FTC have?
- Submit documentation if they think ads are lying
- Ensures competition in the marketplace
Are ads reviewed/checked prior to being released? Does the FTC control the price of the ads?
- Don't check ads for truthfulness/accuracy
- Advertisers can't lie in the ads
What is corrective advertising? How successful has it been?
- Gov't (FTC) will make correct the incorrect info.
- Historically proven to not be effective
What are testimonials? Are they effective? What rules apply to testimonials?
- Testimonials: Celebrities tell their story about using the products
- Rules: Must use the product when you advertise & w/e said about product must be true
Testimonials can be effective because people will probably want to buy the product because of celebrities
Ads that tend to decieve consumers
Purpose of "marketing research":
- Do so by asking questions
- Ex: Mall survey
- Problems with this is that what you may say & do might not match up
Purpose of "motivational research":
- Reach you on a subconscious level
- What you think & do when you see the ad
Techniques for Motivational and Marketing research:
- Ink blot test
- eye blink rate
- eye level
- Sentence &/or story completion, etc
What is subliminal advertising?
- Subconscious level
- May not always see/hear the subliminal message
- "Hidden" messages in ads
- Purpose: to test products
- Publisher: Consumers Union
- Age: Since 1930
- Source of product to be tested: Buy or directly from manufacturer (best way is to buy it)
- Emphasis: Do what they say; safe and efficient
- Advertising in magazines: None; not influenced by advertisers; only get $$ from subscriptions; if you get the subscription then you're part of the C.U.
- April is when they come out with C.R. on just cars.
Kiplinger's Personal Finance Mag:
- Publisher: Kiplinger
- Age: Started 1950's
- Advertising: Does accept
- Emphasis: Not tested; more financial
- Target audience: Middle class
- Cost: $25-28 yearly
- Articles are easy to read
- Information is valuable to consumers
- Publisher: Timelife
- Age: 1970's
- Advertising: Accepts advertising
- Target Audience: Upper middle class & upper class
- Emphasis: How to increase your wealth
- Advantages: Short, quick articles to read
- Testing of products: No
- Cost: $40/year
Consumer Information Catalog:
- Publisher: Gov't
- Frequency: 4 issues/year
- Cost: Free
Difference between Fraud and Deception?
- Fraud- Deception, deceit, trickery and intentional perversion of the truth.
- To prove fraud, must prove their intento to cheat you, difficult to prove
- To decieve, mislead, or to dilute/cheat; don't have to prove.
Not in the best interest of the consumers
Difference between Caveat Emptor and Caveat Venditor?
Caveat Emptor: Consumers Beware (of buyers)
Caveat Venditor: Sellers beware (of consumers taking a stand)
- Business practice that fixes the price of their product
- Removes competition= price goes up (ex: all sell for $5, why not higher?)
- (Ex: Samsung, tobacco, drug makers, shoes, etc.)
Rights that consumers have concerning telemarketers
- Texas:(No Call list)
- Covers intrastate businesses
- Covers interstate businesses
- Restricts time for calls
- Can request no additional calls
- Disclosures required at beginning of call
Common types of scams of Internet/Telemarketing/Mail Frauds:
- Job scams
- Credit card scams
- Nigerian money scams: (coming from internet & other countries besides Nigeria. Ex: Letter in class, bad spelling, wire transfer a lot of money, etc.)
- Area Codes: 809, 284, 876 (Don't ever call these codes, international calls; offshore codes)
- Auctions/ Items for sale (Internet): Fake check scams
- Cramming: Deals w/ telephones; add items/charges onto your bills that aren't necessary
- Moving scams
Internet scams: Spam/Phishing
- Obtaining sensitive info about a person by posing online as someone trustowrthy with a true need for the info
- Haven't been able to control internet fraud
- May be international
- Less protection
Internet scams: Spam
- Junk mail
- Estimated up to 90% of all emails=spam
- Most are deceptive
- LEgislation federal laws are weak- says subject line must say "spam"
- 33 states have some legislation but most are ineffective
Internet scams: Tips to avoid scams
- Don't buy items promoted by spam
- Have 2 email accounts
- Use filters/firewalls & keep them up to date
- Report to ftc.gov
Internet scams: Phishing
- "fishing" for info so they can steal your identity
- Ex: Bank of America letter
How to avoid Phishing scams:
- suspicious or emails with urgent requests (avoid)
- Don't use any links in an email
- Use secure web sites (http:// yellow lock)
- Regularly log onto accounts
- Report if false
- Call you, try to sell you something, get info from you, etc.
- Elderly fall victim most of the time
- Try to sell you something & want you to call them
- "Certified" mail
- Checks in the mail (ex: Check from Carnival cruise)
Third Party Intervention:
- Trying to get both sides to work together well
- Difference is how much power the 3rd party holds
- Mediator, Arbitrator, consumer, business or both will sign an agreement saying that whatever the arbitrator says then they will agree with it
- Settlement of a disagreement between parties by one or more arbitrators by whose decision the parties agree to be bound
- Less expensive
- One/both parties agree this person's decision is final
Form of alternative dispute resolution whereby the parties bring their dispute to a neutral 3rd party who assits the disputants in reaching a voluntary negotiated settlement
Better Business Bureau: BBB
- For consumers (check out business or charity, file complaints, programs & services, resource library, etc.)
- Deals with complaints
- Have to file complaint with the BBB of where the place is; if you're a member & ignore it then you're no longer a member
- A simplified civil court, typically administered by a county court
- Exists in every state
- Purpose: To resolve disputes that involve modest amounts of money
- Monetary amount is set by state law, with typical limit being $3,000-10,000
- Designed for individual consumer to represent himself in proceedings
- Established for consumers who think they've been cheated; no lawyers
- In Texas, the maximum you can sue for is $10,000
- Cost to sue = $125
- Can have a jury trial, can only sue for monetary damages($$ back)
- If other party doesn't show up, automatically win case, but doesn't mean you will get $$ back.
Consumer protection: state level
- Attorney General's Office- Greg Abbott;
- Oversees consumer protection law, files complaints, major lawsuits, fraud and scams, sources of assistance, info for businesses, how not to be taken advantage of, charities & non-profits
- Responsible for enforcing Texas Deceptive Trade Practices Act (consumer protection law)
- Ex: can sue car dealership for odometer fraud
Federal Trade Commission
- Federal agency whose basic responsibility is to enforce consumer protection laws against any illegal acts that are deemed unfair methods of competition or unfair/deceptive trade practices.
- Magnuson-Moss Warranty Act of 1977 strengthened FTC's power to deal with consumer problems by reaffirming its authority to promulgate trade regulation rules and provided funds to allow for public participation in FTC hearings.
Food and Drug Administration FDA:
Federal agency whose basic responsibility is to assure the safety & efficiency of food, drugs, and cosmetics
United States Department of Agriculture USDA:
Federal agency whose basic responsibility is to assure consumers that food is safe, clean, nutritious & attractive
Consumer Product Safety Commission (CPSA):
Federal agency whose basic responsibility is to protect consumers against injuries associated with consumer products.
U.S. Postal Service
- An independent federal establishment which is primarily respoinsible for mail delivery.
- Local postmasters handle complaints and mail fraud allegations.
- If local postmaster is unable to act, the Consumers Advocate of the U.S. Postal Service handles those complaints
Purpose of money management?
Money Mangement: prudent handling of income & expenditures by an individual/family
- How a person thinks about $$ is how a person spends $$.
- The individual's or family's goal in personal money management should be to keep purchases within the limitations of income & to spend resources wisely.
- A person's or family's resources & financial stability may be dictated more by spending habits than by the amt. of income.
- $$ and cents you have to spend
- Amt of pay one receives
- Take money income & exchange it for goods/services, the goods/services become real income.
- The amt of goods/services that one's money will purchase.
- Satisfaction we receive from consuming goods/services purchased with the real income
- Things you enjoy
- Spend money income for real income to have a high level of psychic income.
Total salary before any deductions
Net or Disposable Income:
- What you bring home
- Amt of income left after deducting personal taxes from personal income
- What's left after the "have to's"
- You have to manage it
- That portion of disposable income remaining after paying basic necessities
Fixed Expenses vs. Flexible Expenses
Fixed: Something that's a set amt at a set interval & you can't change it
Flexible: You can impact how much you spend
- Not enough of something
- If you spend it, it's gone
When you spend a certain amt. at certain time, won't have it later on
Steps in Money Management:
(Make a plan; out plan into action/keep records; compare results with plan)
- Define your Goals: What is it you want your money to do? Short term, long term, etc.
- ID & Analyze your Income: Easiest money to manage; regular; predictable; look at last 6 months to see what the most & least averages made.
- Make Financial Plan: This is the way you want your money to go; Categories
- Put Plan into Action
Advantages of having Financial Plan?
- Provides direction for spending (goal based)
- Know where money is being spent
- Helps make decisions about spending
- Can increase savings
- Helps prevent impulse spending
- Provides security in case of emergencies
- Provides "peace of mind"
Too much money chasing too few goods
During inflation, what is happening to the value of the dollar (purchasing power)?
- Value of the $ goes down.
- Can't buy the same things w/ the $ like you used to
3 "tools" available to gov't to control inflation?
- Can regulate imports/exports
- Prices on everything were frozen
- Salaries frozen
- No increase in anyone's incomes
- Didn't resolve the problem and wasn't successful
3 "tools" available to gov't to control inflation?
- Fiscal policy
- Taxing and spending
- Gov't should spend less, increase taxes-inflation times
3 "tools" available to gov't to control inflation?
- Federal Reserve Board
- Recession (interest rates should decrease & make it easier to borrow $)
- Inflation (interest rates should decrease & make it harder for people to borrow $)
Consumer Price Index?
- CIP is a guide that illustrates price changes in a representative selection of goods and services.
- Guide to inflation and has limitations.
Difference between credit and debit?
Credit: Purchasing power extended to you by a store/company/bank & repaid out of future wages & salaries.
Debt: When you accept the purchasing power of credit, I get debt.
Advantages of using Credit?
- Get it now
- Increases your standard of living temporarily
- Can get your rewards/benefits
- Increase/decrease your credit score
- Need to have credit in order to get credit
- Helps to meet emergency expenditures
Disadvantages of using Credit?
- Interest rates
- Hard to keep track of purchases
- If you shop with a credit card, you will probably spend more than when you have cash.
- Story loyalty
3 C's of Credit: Collateral
Putting something of value up in order to secure the loan
3 C's of Credit: Character of Individual
- Check credit history (pay your bills on time?)
- Renter vs. home owner
- Look at how many times you've moved in the last 2 yrs. (higher mobility, the more they assume you're not responsible)
- Character of individual is most important
3 C's of Credit: Capactiy to Repay
- Know your income & will you make the payments
- How much are you already paying out of the income to other creditors (20% of your income; debt level needs to be safe)
- How far is your income going to go?
- Independent vs. Dependents
- Job stability?
What's considered to be a safe debt load for a consumer?
20% of income
Purpose of credit bureaus and what type of information is contained in credit files?
- Credit bureaus can sell this info about your credit history to employers, creditors & insurance companies
- Can check without your permission
- In the business of extending credit
- How long info stays in file (7 yrs., bankruptcy 10)
- How many cash loans you have
- Buying a car
- Credit cards
- Highest balance you've had?
- Do you pay in full & how much each month?
- Are you on time or late?
- Have you quit paying?
Credit bureau facts:
- Report should be the same for all 3 credit bureaus, but some creditors may not report to all 3.
- Can get one free credit report each year from each of the bureaus; rotate every 4 months
- Check to make sure your credit history is correct to make sure you haven't beena victim of identity theft.
- Range of scores: 620 is dividing line between good & bad credit
- 693 is the average credit score
- 720 & up are most favorable rates
- Credit score can determine what type of low interest loans you can get
- When getting a job
- Utility deposits will be lower with better credit.
Figure credit card based on:
- 35% of payment history
- 30% amt. owed
- 15% length of credit history
- 10% new credit
- 10% type of credit cards
Best sources/Worst sources of borrowing cash?
- Annual Percentage Rate
- Best credit cards will have a low APR
- Credit score & FICO will affect what type of c.c. you can get
- Higher APR= stuff's costing me more
- Life insurance policies (best)
- Payday loans (worst)
- Same loan, but if they discount it that day they will subtract the finance charge right away;
- Then go back and pay the full amt and the finance/discount charge
- Ex: $1000-$80=$920; you're not getting the 1000, but when you go back to pay you're paying the full 1000
- Don't swap interest rates for ones that are higher
- Temptation to charge & now you have more loans to pay interest on
- Put all your credit cards in one loan & make one payment instead of many
- Interest rates may be higher than the credit cards themselves & sometimes people will continue to use the c.c. after they've used the consolidation loan to pay them off
- Might be Okay:
- If I can take a lower rate & pay them off that would be good & don't go back & charge on the credit cards (keep payments the same).
Installment vs. Non-installment Loan?
- Pay on the reg
- Arranging a purchase of a good/service by paying a specific amt over a specific amt of time
- Non Installment:
- Pay it all at one time & the finance charge
Secured Note & Unsecured Note?
- If you don't pay they take the collateral
- More safe for banks/loan offices
- Possible lower interest rates
- No collateral involved
5 pts. consumers should evaluate credit cards?
1. What's APR OF INTEREST?
- 1. What's APR of interest?
- How important is APR
- Best cards will have low APR
- Credit score & FICO will affect what type of credit card you can get
- Higher APR= stuff is costing you more
2. Is there a 25 day grace period?
- We want the longest grace period in order to turn in/mail the bill in so it's considered "on time"
- By law, you're supposed to have a 21 day grace period
3. What is the Annual Fee?
- Does the c.c. cost you anything?
- Majority of c.c. are free
- Get a free c.c. as long as there's one available
- Most important to look for (if not free, throw away)
4. What mehtod is used to compute the finance charge?
Previous balance, adjusted balance and average daily
5. Which method is best for c.c. companies? Consumer?
- Credit card companies use previous, but most are using average daily.
- Consumers use adjusted balance
- Over the limit
- ATM withdrawals
- Balance transfers
- Overseas fees to convert
Why is it important to know about the "grace period"?
- We want the longest grace period in order to turn in/mail the bill in so it's considered "on time".
- By law, supposed to have a 21 day grace period
Previous Balance method:
- Get a bill for 500, I pay 400, now have balance of 100 & calculate interest on total amt of bill
- As though you paid them nothing
Adjusted Balance method:
- New balance is 100
- Take interest rate & calculate on the new balance
- Interest rate is applied to the balance of bill after payment has been applied
Average Daily method:
Interest rate is applied to teh daily average balance during the current billing cycle (30 day avg.)
Credit Card Company
Using previous balance, but most are using average daily
- Using adjusted balance
- When you send in your payment makes a difference to the balance & which method is being used
- As long as you pay off the balance coming into the month; take the new purchase & add it into your balance
- Balance & interest rate increase (because you bought something new)
- They have to tell you if they add the new purchases into the balance or if they keep it seperate.
Truth In Lending:
- Must disclose APR, finance charge, all costs to consumer & total costs
- 3 day cooling off
- Credit advertising
- Illegal to send unsolicited c.c.s
- Lost or stolen cards (unauthorized charges-maximum liability is $50)
Fair Credit Reporting Act
- Right to see credit report at Credit Bureau
- Right to correct incorrect info in credit report
Fair Credit Billing Act
- Right to correct incorrect bills within reasonable time period
- Right to withhold payment over faulty merchandise
- Made 3rd party holder of credit contracts accountable
Equal Credit Opportunity Act
Illegal to discriminate in the granting of credit on teh basis of sex, marital status, age, race, color, religion, national origin, or because a person is on welfare.
Fair Debt Collection Practices Act
Makes it a federal offense for debt collectors to threaten consumers with violence, use obscene language, or contact consumers by telephone at inconvenient times or places
Fair Credit and Charge Card Disclosure Act
Must disclose APR, grace period, method of calculating finance charge, annual fee & minimum finance charge with unsolicited credit card applications
Fair and Accurate Credit Transaction Act
Free credit report from 3 credit bureaus each year
Credit Accountability, Responsibility, and Disclosure Act
- Under 21 (proof of income/cosigner)
- Restrictions on college campuses
- 21 day grace period (minimum)
- Restricts interest rate increases during first year
- Restricts interest rate changes on existing balances
- 45 day notice of interest rate changes
- Debit cards (opt-in for overdraft charges)
If consumer defaults, creditor has right to "accelerate" the rest of the payments & make the entire balance due now
In default, the consumer is liable for the remaining balance even after the item is repossessed
The final payment is substantially larger (at least 50%) than the previous payment
Explains how multiple payments are applied by the creditor to multiple items purchased
Lawyer's Fee Clause:
Creditor has right to hold you responsible for all costs related to the default
See notes related to Fair Credit Billing Act
Why is it recommended to buy a used car rather than a new car?
- When you drive a new car off the lot, it depreciates
- Buy a car that's 2 years old, keep it for 2 years, then sell it becasue maintenance costs will begin to increase
- Do your homework
- Compare similar cars made by the same company
- Look at the cost of info: True cost of ownership; depreciation is the biggest costs of ownership
- Odometer tampering: Fraud
- 2nd Opinion: From a mechanic
- Lemon Busters: Reports findings within 24 hrs.
Research of cars:
- Dependability and reliability
- Resale value
- Cost info
- HOw much is maintenance cost
When are good times to shop for a new car?
- End of December-Early January
- End of season
- End of month
- When Inventories are High= Low Sales
Rebate from manufacturer based on how fast they moved the car
Need to know this because it tells you how much they actually paid for the vehicle
On paperwork; paid for car
- Increase the down payment to get a lower interest dollar amt on what's left of the amt.
- (Ex: car costs 20,000; make down payment of 5,000; pay 8% APR on $ left over which is 15,000)
- Try to negotiate the APR
- Lower FICO score= increased APR
Length of Time:
- Take shortest time period
- Take lower APR= finance on smaller amt
- Less you finance=less total cost