NEDP Consumer Economics 1 — Questions and Answers
Question 1: What is 'supply and demand' and how does it affect price?
- When supply decreases or demand increases, prices generally rise; when supply increases or demand decreases, prices generally fall. (Correct answer)
- When supply increases, prices always rise regardless of demand.
- Demand has no effect on price in a free market.
- Supply and demand only affect the prices of luxury goods.
Correct answer: When supply decreases or demand increases, prices generally rise; when supply increases or demand decreases, prices generally fall.
Price is determined by the relationship between how much of a product is available (supply) and how much consumers want (demand).
In a market economy, prices are set by the interaction of supply and demand. If demand for a product rises while supply stays the same, sellers can charge more — prices rise. If supply increases (more product available) while demand stays constant, sellers must compete and lower prices. This dynamic guides resource allocation without central planning.
Question 2: What does the term 'APR' mean on a loan or credit card?
- Annual Percentage Rate — the yearly cost of borrowing expressed as a percentage (Correct answer)
- Average Payment Required — the minimum monthly payment
- Applied Principal Reduction — how much of each payment goes to the loan balance
- Annual Payment Receipt — a summary of yearly payments made
Correct answer: Annual Percentage Rate — the yearly cost of borrowing expressed as a percentage
APR (Annual Percentage Rate) represents the yearly interest cost of a loan, including fees, expressed as a percentage.
The APR is the true annual cost of borrowing, including interest plus required fees, expressed as a percentage. It allows consumers to compare loan and credit card costs on an equal basis. A lower APR means less expensive borrowing. Truth in Lending Act (TILA) requires lenders to disclose APR so consumers can make informed comparisons.
Question 3: What is 'comparison shopping' and why is it a smart consumer practice?
- Checking multiple stores or sources for the best price and value before buying (Correct answer)
- Comparing your purchases to those of neighbors
- Only buying the cheapest version of any product
- Asking store employees to match competitors' prices
Correct answer: Checking multiple stores or sources for the best price and value before buying
Comparison shopping helps consumers find the best value — not always the lowest price, but the best combination of price, quality, and features.
Comparison shopping involves evaluating multiple sources (different stores, websites, brands) on price, quality, warranty, and total cost of ownership before purchasing. It helps avoid impulse purchases and ensures value. Tools include price-comparison websites, consumer reviews, and unit pricing labels. Smart consumers consider total value, not just sticker price.
Question 4: What does the FTC (Federal Trade Commission) do to protect consumers?
- It enforces consumer protection laws, prevents deceptive advertising, and investigates fraud. (Correct answer)
- It sets prices for essential goods and services.
- It provides loans to consumers with poor credit.
- It regulates the stock market and investment products.
Correct answer: It enforces consumer protection laws, prevents deceptive advertising, and investigates fraud.
The FTC protects consumers from deceptive business practices, false advertising, identity theft, and anticompetitive behavior.
The Federal Trade Commission (FTC) is the primary U.S. consumer protection agency. It enforces laws against deceptive advertising, misleading marketing (including online), identity theft, unfair business practices, and anticompetitive mergers. Consumers can file complaints at ftc.gov. The FTC also publishes free consumer education resources on topics like credit, debt, and scams.
Question 5: What is a 'warranty' on a consumer product?
- A promise by the manufacturer or seller to repair or replace the product under certain conditions (Correct answer)
- A certificate proving you paid the correct price
- An insurance policy requiring a separate monthly premium
- A return policy that allows refunds for any reason
Correct answer: A promise by the manufacturer or seller to repair or replace the product under certain conditions
A warranty is a guarantee that the product will perform as described for a specified period; defects are repaired or the product replaced.
Warranties come in two types: express warranties (written promises about product performance, duration, and what's covered) and implied warranties (unwritten legal guarantees that a product will work as intended). The Magnuson-Moss Warranty Act governs consumer product warranties in the U.S. Always read warranty terms before purchasing major items.
Question 6: When a product is advertised as being '50% off,' what does this mean?
- The current selling price is half of the original listed price. (Correct answer)
- You must buy two to get one at half price.
- The item costs $50 regardless of the original price.
- The item is on clearance and cannot be returned.
Correct answer: The current selling price is half of the original listed price.
'50% off' means the original price has been halved — you pay half of what was originally charged.
A 50% discount means the price has been reduced by half. If an item originally costs $80 and is 50% off, you pay $40. Consumers should verify the 'original' price is legitimate and not inflated. The FTC regulates deceptive pricing practices that falsely inflate original prices to make discounts appear larger than they are.
NEDP Consumer Economics 1
What is 'supply and demand' and how does it affect price?