Consumers in the United States purchase between 5.5 and 6 trillion dollars worth of goods and services annually, making the U.S. economy by far the largest in the world. This economy is sometimes called a "free market" economy because, for the most part, the goods and services produced and the prices charged for those goods and services are determined by what consumers want and how much they are willing to pay for it. Except in rare cases of regulated industries, the government does not dictate to producers how much of a product they can make or how much they may charge for the product. Using sophisticated research methodologies, industries determine the consumer demand for a given product and at what price they may sell that product to make the largest possible profit. Marketing experts then develop advertising campaigns to convince consumers to buy their company's product rather than the competition's. If two or more companies offer similar products of equal quality, consumers may make their buying decisions based upon the more appealing advertising campaign or upon which product is priced lower.
How Can Consumers Learn More About Products?
In an economy driven by consumer demand for goods and services, it is important for those consumers to have access to data that will assist them in making purchasing decisions. In the United States, numerous organizations have been formed to provide consumers with information about the quality and pricing of commodities and services offered by businesses. Consumers Union is a non-profit organization that publishes Consumer Reports, a monthly magazine that reports the results of testing done on various types of products, ranging from food items to electronic equipment to automobiles. The magazine articles rate the tested products on the basis of quality, price, and value. To decrease the possibility of bias in the magazine, Consumer Reports does not accept any advertising. Thus, its writers and editors are not influenced in their reporting to be less critical of a product simply because its producer pays the magazine huge amounts in advertising dollars. In addition to nonprofit groups such as Consumers Union, there are also a number of for-profit organizations that issue ratings of consumer goods and services. One of the largest, J. D. Powers and Associates of Agora Hills, California, does scientific surveys of consumers to determine their level of satisfaction with the products they use. When a company's product comes in at or near the top of a Powers survey, it will frequently tout this fact in their future advertising.
Understanding Unit Pricing
With so many sources of data available, it might seem that the American consumer should be able to make selections easily in the marketplace, but the fact that so many companies are vying for the consumer dollar can lead to a dizzying array of choices for the consumer to make. Most companies are not satisfied to market or price a given product in only one way. In addition to regular grocery stores, for example, there have arisen so-called convenience stores located near almost any neighborhood to make it easy for people to make a quick drive or walk to pick up one or two items of immediate need. There is a price for this convenience, however. A gallon of milk or a loaf of bread is typically more expensive at the convenience store than at the larger grocery stores. At the other end of the scale, there are huge "warehouse" stores that typically sell items in bulk at lower unit prices than the traditional grocery stores. Thus the idea of unit pricing is an important concept for consumers to understand.
The unit price for a product might be expressed, for example, in price per ounce. Thus a 16-ounce loaf of bread priced at $2.40 would have a unit price of $2.40/16oz., which equals 15 cents per ounce. Now suppose that
the same store has a 24-ounce loaf of the same brand of bread for $3.20. Which should the consumer buy? Based on unit price alone, the 24-ounce loaf is less expensive, since $3.20/24oz is only about 13 cents per ounce. On the other hand, suppose that this consumer cannot eat more than 16 ounces of bread in a week and that after a week the remaining bread has started to become stale and must be thrown away. Then the consumer has actually paid $3.20 for 16 ounces, which comes to 20 cents per ounce. Clearly, if one buys something in large quantities at a lower price per unit, it is only a bargain if the product will remain usable to the consumer over a longer period of time. Thus, buying light bulbs or canned foods in bulk makes sense if the unit price is lower than for smaller quantities, because light bulbs and canned food can be stored for long periods of time.
Another example is long-distance minutes. Mobile phone companies typically sell minutes of calling time in various quantities, usually at a lower "per minute" price for, say, 300 minutes per month than for 100 minutes per month. However, if the consumer seldom talks more than 100 minutes per month, the consumer is, in effect, throwing away the remaining 200 minutes, just like the grocery shopper throws away unused bread. The actual unit price per minute is then likely to be larger than the stated unit price. In such cases, the consumer is helped by knowing some simple consumer math, but must also be aware that mathematics applied in the absence of common sense can do more harm than good.
see also Data Collection and Interpretation.
Landsbury, Steven E. The Armchair Economist: Economics and Everyday Life. New York: The Free Press, 1993.
ARE SALES REALLY GOOD DEALS?
The theory of discounting is to set an artificially high price, and then discount off this price. For example, examine how cotton sweaters arrive in a clothing store. Cotton is grown and sold to the sweater manufacturer (first markup). Sweaters are made, a brand name is attached, and they are sold to a distributor (second markup). The clothing store's buyers order the sweaters from distributors and put them on the shelves (third markup).
The sweaters are then typically offered at full retail price for several months. When the season closes, sweaters that did not sell are marked down. Assume the average total markup of a sweater from the farmer to the clothing store is 40 percent. If the sweaters are marked 30 percent-off prices still allow the clothing store a 10 percent profit margin on the sweaters. Thus, stores still profit when they have sales, with the volume of merchandise sold making up for the lower profit margin.
Whether these sales offer good values to the consumer depends upon the quality of products offered, the availability of the products from sources other than retail stores and the needs of the consumer.