consumer price index

(noun)

A statistical estimate of the level of prices of goods and services bought for consumption purposes by households.

Related Terms

Examples of consumer price index in the following topics:

  • Defining and Calculating CPI

    • The consumer price index (CPI) is a statistical estimate of the change in prices of goods and services bought for consumption.
    • The consumer price index (CPI) is a statistical estimate of the level of prices of goods and services bought for consumption by households.
    • All of the information is combined to produce the overall index of consumer expenditures.
    • The graph shows the consumer price index in the United States from 1913 - 2004.
    • The x-axis indicates year, the left y-axis indicates the Consumer Price Index, and the right y-axis indicates annual percentage change in Consumer Price Index, which can be used to measure inflation.

  • Price Indices and the Rate of Change of Prices

    • Broad price indices, such as the consumer price index (CPI) or the GDP deflator are often used to measure inflation throughout the entire economy, while narrower ones, such as the consumer price index for the elderly (CPI-E) measure the inflation experienced by specific groups of people or industries.
    • The Laspeyres index and the Paasche index are two price indexes that attempt to compensate for this difficulty.
    • Two common price indices are the Consumer Price Index (CPI) and the Producer Price Index (PPI).
    • The CPI reflects changes in the prices of goods and services typically purchased by consumers, and includes price changes in imported goods.
    • The above graph shows the annual inflation rate and the consumer price index from 1913 to 2003.

  • Measuring Inflation

    • The inflation rate is widely calculated by calculating the movement or change in a price index, usually the consumer price index (CPI) The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a "typical consumer".
    • CPI is usually expressed as an index, which means that one year is the base year.
    • The index for another year (say, year 1) is calculated by $CPI_{year 1}=({Basket Cost}_{year 1}/{Basket Cost}_{base year}) * 100$
    • The price index is (212/207)*100, or 102.4.
    • The U.S. inflation rate is measured by comparing the price of goods in one year to the price of goods in a previous base year.

  • The GDP Deflator

    • The GDP deflator is a price index that measures inflation or deflation in an economy by calculating a ratio of nominal GDP to real GDP.
    • The GDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy.
    • It is a price index that measures price inflation or deflation, and is calculated using nominal GDP and real GDP.
    • Like the Consumer Price Index (CPI), the GDP deflator is a measure of price inflation/deflation with respect to a specific base year.
    • The GDP deflator measures price inflation in an economy.

  • Impacts of Price Changes on Consumer Surplus

    • Consumer surplus decreases when price is set above the equilibrium price, but increases to a certain point when price is below the equilibrium price.
    • Consumer surplus is defined, in part, by the price of the product.
    • Assuming that there is no shift in demand, an increase in price will therefore lead to a reduction in consumer surplus, while a decrease in price will lead to an increase in consumer surplus.
    • When a price floor is set above the equilibrium price, consumers will have to purchase the product at a higher price.
    • An increase in the price will reduce consumer surplus, while a decrease in the price will increase consumer surplus.

  • The Demand Curve and Consumer Surplus

    • Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they do pay.
    • Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they do pay.
    • This area represent the amount of goods consumers would have been willing to purchase at a price higher than the pareto optimal price.
    • Generally, the lower the price, the greater the consumer surplus.
    • Consumer surplus, as shown highlighted in red, represents the benefit consumers get for purchasing goods at a price lower than the maximum they are willing to pay.

  • Analysis of Price Discrimination

    • Third degree price discrimination: the price varies according to consumer attributes such as age, sex, location, and economic status.
    • Coupons: coupons are used in commerce to distinguish consumers by their reserve price.
    • A manufacturer can charge a higher price for a product which most consumers will pay.
    • By using price discrimination, the seller makes more revenue, even off of the price sensitive consumers.
    • Retail incentives: uses price discrimination to offer special discounts to consumers in order to increase revenue.

  • Impact of Price on Consumer Choices

    • The demand curve shows how consumer choices respond to changes in price.
    • In almost all cases, consumer choices are driven by prices.
    • As price goes up, the quantity that consumers demand goes down.
    • The construction of demand, which shows exactly how much of a good consumers will purchase at a given price, is defining of consumer choice theory.
    • A highly elastic good will see consumers much less likely to purchase when prices are high and much more likely to purchase when prices are low, while a good with low elasticity will see consumers purchasing the same quantity regardless of small price changes.

  • Examples of Price Discrimination

    • The purpose of price discrimination is to capture the market's consumer surplus and generate the most revenue possible for a good.
    • First degree - the seller must know the absolute maximum price that every consumer is willing to pay.
    • The purpose of price discrimination is to capture the market's consumer surplus.
    • Coupons: coupons are used to distinguish consumers by their reserve price.
    • Coupons allow price sensitive consumers to receive a discount.

  • Price Floor Impact on Market Outcome

    • A price floor will only impact the market if it is greater than the free-market equilibrium price.
    • Economic surplus, or total welfare, is the sum of consumer and producer surplus.
    • Consumer surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest that they are willing pay.
    • An effective price floor will raise the price of a good, which means that the the consumer surplus will decrease.
    • While the effective price floor will also increase the price for producers, any benefit gained from that will be minimized by decreased sales caused by decreased demand from consumers due to the increase in price.