Chapter 3, Problem 1AA

To determine

The factors that will help decide the expenditure of money rather than saving it.

Answer to Problem 1AA

To decide how to spend the money earned is an important thing to plan about. Various things have to be considered while spending your money. A consumer has to not only look at his desires but also the disposable income he holds as per which the spending has to be done. After all the expenditures of taxes, social security and basic needs are done, the discretionary income is used to fulfill other desires. While taking the decision to spend the money, a consumer has to be rational in making choices considering the product he/she is to buy. He/she should have prior information about the product with its details of price, quality, price of related goods, substitute goods available in the market, its warranty, brand image, etc. So as to know about the product, one has to look on to the informative advertising of the product, its brand name and image and even make comparison shopping so that he/she can get the best product from the money he/she is to spend. Moreover there are people who choose generic brands rather than the branded products as generic products are less expensive and sometimes with the same quality.

Explanation of Solution

While deciding to spend following things has to be taken care of:

    • The disposable or the discretionary income the consumer holds so as to fulfill his/her desires.

    • The consumer has to make rational choices looking on the opportunity cost of the product he/she is to buy.

    • Comparison shopping is to be done so as to get the best product comparing various products under various factors.

    • The brand image, the brand name, the guarantee and warranty, etc has to be looked into before buying the product.

    • The consumer should gather all the relevant information from the informative advertising of the product so that the money he/she spends can provide maximum satisfaction.

Economics Concept Introduction

Introduction: Major terms explained:

Disposable income: it is the income left after deducting the taxes and the social security payments.

Discretionary income: It is similar to the disposable income as it is the income left after deducting the payments of taxes and social security along with the cost of basic needs in the living.

Comparison shopping: this term is used to explain the comparison done by the consumers for the product they are going to buy, with similar products or at different stores considering the prices, quality, quantity, substitute available, warranty, etc.