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Llad Phillips 1
Introduction to EconomicsOutline: Lecture One
Introduction to EconomicsOutline: Lecture One
Information About the CourseInformation About the Course What is economics all about?What is economics all about? Examples: Elements of Personal FinanceExamples: Elements of Personal Finance
Buying or Leasing a CarBuying or Leasing a Car
Economics 109 Llad Phillips Fall 2002Introduction to Economics
Hour, Location: 2:00-3:15, Engineering 1104Instructor: Llad Phillips, [email protected] Hours: NH 3032, 9:30-10:15 TuTh and 10:30-11:15 W, and by appointment
Arthur O’Sullivan and Steven Sheffrin, Economics, Principles and Tools, Third Edition(2003,2001)
Labs(sections)12617 F 9:00-9:50 AM Jalama Lab, Phelps 1517
MCL 12625 M 2:00-2:50 PM Rincon Lab, Phelps 151812633 M 7:00-7:50 PM Jalama Lab, Phelps 151712641 W 8:00-8:50 AM Jalama Lab, Phelps 1517
Note 12658 Th 6:30- 7:20 PM Rincon Lab, Phelps 151812666 F 1:00-1:50 PM Rincon Lab, Phelps 1518
Teaching Assistants: Dunghun Cho, Office: NH 2048Taeil Kang, Office: NH 2048Kirk Lesh, Office: NH 2043
Exams:Quiz: Tuesday, Oct. 17. You will need scantron sheet and #2 pencil.Midterm: Tuesday, Nov. 5, 2:00-3:15 PM. You will need scantron sheet
and #2 pencil.Final: Thursday, Dec. 12, 4:00-7:00 PM, You will need scantron sheet and
#2 pencil.
Problem Assignments: At least half of the questions on the 25 minute quiz will be from the assigned problems, both text and lab. Due at the next Lab(section).
Standing Assignment: Read the business section of the Los Angeles Times .
Course Home Page: http://www.econ.ucsb.edu/ Note: menu on the
left, Class Pages: Economics 109
Text Home Page:http://www.prenhall.com/osullivan/
Lecture Topics and Reading List
Part OnePersonal Finance: Economics in Everday Life
1. Tuesday Sept. 25, Lecture One: "Choosing a method to finance a car"Buying or Leasing a car
The choice between:paying cashleasingbuying on time
Reading Assignment:
O’Sullivan and Sheffrin: Ch.1, “Introduction: What is Economics?”
emphasis: concepts of scarcity and production possibilities curve
O’Sullivan and Sheffrin: Appendix to Ch.1, “Using Graphs and Formulas”
Problems O & S Text: p.13: 1, 2, 3, 4, 5.p. 21: 1, 2, 3, 4, 5, 6
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Collective, Group or Social Behavior
Collective, Group or Social Behavior
PoliticalPolitical SocialSocial CulturalCultural EconomicEconomic
How to understand and cope with the economic How to understand and cope with the economic part of lifepart of life
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Topics in Personal Finance, What Can We Learn from Econ?Topics in Personal Finance, What Can We Learn from Econ? Buying a CarBuying a Car Buying a HouseBuying a House Budgeting ExpensesBudgeting Expenses Saving and Investing MoneySaving and Investing Money
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Concepts and Buying a CarConcepts and Buying a Car
ScarcityScarcity Consumer Durable and DepreciationConsumer Durable and Depreciation opportunity costopportunity cost Consumer ChoiceConsumer Choice
brand and model brand and model how to payhow to pay
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Five Topic AreasFive Topic Areas Personal Finance and the IndividualPersonal Finance and the Individual
incomeincome expenditureexpenditure
income-expenditure statementincome-expenditure statement
wealth or net assetswealth or net assets asset-liabilities statementasset-liabilities statement
The National EconomyThe National Economy Markets: Competition versus MonopolyMarkets: Competition versus Monopoly The Global EconomyThe Global Economy Economic WelfareEconomic Welfare
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Five Topic AreasFive Topic Areas II. The National EconomyII. The National Economy
consumersconsumers business firmsbusiness firms governmentgovernment
III. Competition versus Monopoly, the FirmIII. Competition versus Monopoly, the Firm how monopoly shafts the consumerhow monopoly shafts the consumer how competition benefits the consumerhow competition benefits the consumer anti-trust policyanti-trust policy
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Five Topic AreasFive Topic Areas
IV. The Global EconomyIV. The Global Economy TradeTrade Balance of PaymentsBalance of Payments Foreign ExchangeForeign Exchange
Economic WelfareEconomic Welfare distribution of incomedistribution of income povertypoverty aging and healthaging and health public goods, e.g. safetypublic goods, e.g. safety
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Year Before Last Year’s (2000)Current Economic Questions
Year Before Last Year’s (2000)Current Economic Questions
Who is better for you, Bush or Gore?Who is better for you, Bush or Gore? Is the great bull market of the 90’s over?Is the great bull market of the 90’s over? Is the economy about to crash?Is the economy about to crash? Is Japan going to recover?Is Japan going to recover? Will the government break up Microsoft?Will the government break up Microsoft?
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Last Year’s (2001)Current Economic Questions
Last Year’s (2001)Current Economic Questions
Are we in a recession?Are we in a recession? How bad could it get?How bad could it get? How long will it last?How long will it last? Will the stock market stabilize?Will the stock market stabilize? What kind of economic impact did the What kind of economic impact did the
attack have?attack have? If we continue to mobilize, what kind of If we continue to mobilize, what kind of
economic impact will that have?economic impact will that have?
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http://www.odci.gov/ World Factbook 2001
Afghanistan,GDP per capita: $800 versus US $36,200
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http://www.odci.gov/ World Factbook 2001
Iraq,GDP per capita: $2500 versus US $36,200
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Introduction to EconomicsIntroduction to Economics
Elements of Personal FinanceElements of Personal Finance
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Elements of Personal FinanceElements of Personal Finance
Economics in every day lifeEconomics in every day life buying or leasing a carbuying or leasing a car buying or renting a homebuying or renting a home personal financial planningpersonal financial planning managing personal investmentsmanaging personal investments managing a household budgetmanaging a household budget determinants of personal incomedeterminants of personal income
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Buying or Leasing a CarBuying or Leasing a Car
Your choice of vehicleYour choice of vehicle Is it what you need?Is it what you need? Is it what you want?Is it what you want? Is it what you can afford?Is it what you can afford? Loss of value through depreciation of your carLoss of value through depreciation of your car
physical wear and tearphysical wear and tear decrease in resale value: paying a premium for decrease in resale value: paying a premium for
newnessnewness
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The Process of Economic Decision MakingThe Process of Economic Decision Making Compare alternative choicesCompare alternative choices
if you make a choice are you giving anything if you make a choice are you giving anything up (a cost) to get what you want?up (a cost) to get what you want?
Which is the best choice?Which is the best choice? Criteria: lowest cost or highest benefit net of Criteria: lowest cost or highest benefit net of
costcost
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Economic Concept: Consumer Durable, e.g. car, refrigeratorEconomic Concept: Consumer Durable, e.g. car, refrigerator perishable good: strawberriesperishable good: strawberries
experience with Farmers’ Marketsexperience with Farmers’ Markets Haymarket Square in BostonHaymarket Square in Boston
Why did institutional buyers, such as convents, buy on Why did institutional buyers, such as convents, buy on late Saturday afternoons?late Saturday afternoons?
durable good: cardurable good: car resale value declines each yearresale value declines each year
How does this affect choice of which car to buy?How does this affect choice of which car to buy?
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Sources of InformationSources of Information Kelley Blue Book: Used Car GuideKelley Blue Book: Used Car Guide
bookstoresbookstores Kelley Blue Book: InternetKelley Blue Book: Internet
Universal Resource Locator(URL)Universal Resource Locator(URL) http://www.kbb.com/http://www.kbb.com/
ManufacturersManufacturers NissanNissan
http://www.nissandriven.com/http://www.nissandriven.com/
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Economic Decision MakingEconomic Decision Making
choice of a vehiclechoice of a vehicle Nissan Altima XE 4-Dr SedanNissan Altima XE 4-Dr Sedan Ford Taurus 4-Dr SedanFord Taurus 4-Dr Sedan
choice of payment methodchoice of payment method cashcash leaselease payment planpayment plan
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Economists Assume You Know What You LikeEconomists Assume You Know What You Like Lingo: economists call these consumer Lingo: economists call these consumer
tastes or consumer preferencestastes or consumer preferences
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Economists Assume You Can make ComparisonsEconomists Assume You Can make Comparisons example 1996 Altima vs. 1996 Ford Taurusexample 1996 Altima vs. 1996 Ford Taurus
compare specifications or attributescompare specifications or attributeswe know price for a bundle of attributeswe know price for a bundle of attributes
• e.g. horsepower, miles per gallon, etc. e.g. horsepower, miles per gallon, etc. dealer invoice (with destination charge)dealer invoice (with destination charge)
Altima: $14,641Altima: $14,641Taurus: $17,171Taurus: $17,171
manufacturer’s suggested retail price (MSRP)manufacturer’s suggested retail price (MSRP)Altima: $16,219Altima: $16,219Taurus: $18,545Taurus: $18,545
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Economists Assume You Can Make TradeoffsEconomists Assume You Can Make Tradeoffs Do you prefer a Ford Taurus or an Altima Do you prefer a Ford Taurus or an Altima
plus $2,326 = $18,545 - $16,219 ?plus $2,326 = $18,545 - $16,219 ? If you prefer the Ford, then you buy the TaurusIf you prefer the Ford, then you buy the Taurus If you prefer the Nissan plus the cash, then you If you prefer the Nissan plus the cash, then you
buy the Altimabuy the Altima If you are indifferent between these two options If you are indifferent between these two options
or bundles of goods ( car plus cash), then you or bundles of goods ( car plus cash), then you might buy either one might buy either one
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Data
Kelley’sPrices
Nissan’sSpecs
Framework“Your Tastes”
Information
Decision:Choice ofVehicle
Economics Framework: Converting Data Into Useful Information for Decisions
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Data
?
?
Framework?
Information
Decision:Choice of Payment
Economics Framework: Converting Data Into Useful Information for Decisions
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CashCash for cash, the bottom line is equal to: for cash, the bottom line is equal to:
total cost - resale value total cost - resale valuethe total cost is going to depend on the total cost is going to depend on
manufacturer’s suggested retail manufacturer’s suggested retail price, MSRPprice, MSRP
the resale value will depend on the the resale value will depend on the value lost from depreciationvalue lost from depreciation
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Depreciation: Taurus, GL SedanDepreciation: Taurus, GL Sedan
Year MSRP Kelley* Depreciation1996 18,5451995 18,295 14,750 3,5451994 18,280 13,350 4,9301993 17,675 11,700 5,9751992 17,619 10,200 7,4191991 16,595 8,800 7,7951990 16,054 7,750 8,304
* Excellent Condition
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Depreciation: Taurus
0100020003000400050006000700080009000
0 2 4 6Age of Vehicle
Dep
recia
tion
, $
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Taurus Depreciation As Fraction of MSRP
0
0.1
0.2
0.3
0.4
0.5
0.6
0 2 4 6Age of Vehicle
Fra
cti
on
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Choice: cash Choice: cash
purchase price: $16,488purchase price: $16,488 tax at 7.5 %: $1,237tax at 7.5 %: $1,237 documents: $35documents: $35 total: $17,760total: $17,760
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KeepYourMoney
This Year Next Year Year After
$17,760 $17,760 $17,760
$1,225* $1,225
$1,225
* @ 6.9 % interest$17,760 $18,985 $20,210
BuyTheCar,Cash
Car’s ServicesFor 1 Yr.
Car’sServicesFor 2 Yrs.
Resale value: $14,947** $13,538#** MSRP - Depreciation = MSRP - MSRP * 0.194 = $18,545 * 0.806
# MSRP - Depreciation = MSRP - MSRP * 0.27 = $18,545 * 0.73
Cost of Car’s Services: $4,038(1 Yr.) & $6,672(2 Yrs.)
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Note:Note: The first years cost:The first years cost:
$18,985 - $14,947 = $4,038$18,985 - $14,947 = $4,038 (principal + interest) -depreciation = principal - (principal + interest) -depreciation = principal -
(depreciation - interest)(depreciation - interest) Bottom Line = Total Cost - Resale ValueBottom Line = Total Cost - Resale Value
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Economic PrinciplesEconomic Principles A dollar today is not the same as a dollar tomorrow!A dollar today is not the same as a dollar tomorrow!
$10 today @ 6.9% = $10 * 1.069 next year$10 today @ 6.9% = $10 * 1.069 next year The “opportunity cost” of spending your money is The “opportunity cost” of spending your money is
the foregone interest.the foregone interest. The cost of buying the services of the car, The cost of buying the services of the car,
neglecting operating costs:neglecting operating costs: depreciation: owning a new cardepreciation: owning a new car foregone interestforegone interest
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Data
?
?Framework:DepreciationForegone Interest
Information
Decision:Choice of Payment
Economics Framework: Converting Data Into Useful Information for Decisions
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Choice: LeaseChoice: Lease drive-off costs(payments due at lease signing): drive-off costs(payments due at lease signing):
$2,136.77$2,136.77 total of 24 monthly payments: $7248 = 24 total of 24 monthly payments: $7248 = 24
months * $302 per monthmonths * $302 per month monthly Payment: $249 + taxmonthly Payment: $249 + tax tax + documents = $1237 + $35 = $1272, or $53 per tax + documents = $1237 + $35 = $1272, or $53 per
monthmonth total: $9384.77total: $9384.77
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This Year Next Year Year After
$2,450$1,225*
$4,222
$6,672* @ 6.9 % interest $4,038
Buy TheCar, Cash
foregone interest on $17,760:
depreciation:
# price+tax-blue book = $17,760 - 0.806*$18,545
$2,813#
Lease, 24 monthstotal drive-off: $2,137 $2,137
total monthly payments @$302/m.: $3,624 $7,248
foregone interest on $2,137**: $147 $294
$5908 $9679** Assumes no opportunity cost of monthly payments
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Example: Buying a New ‘96 Taurus: Advertised Price $16488Example: Buying a New ‘96 Taurus: Advertised Price $16488 KnownsKnowns
advertised price + tax + documents: $17,760advertised price + tax + documents: $17,760 down payment: $2,137down payment: $2,137 loan amount: $15,623loan amount: $15,623
loan amount = $17,760 - $2,137loan amount = $17,760 - $2,137
annual interest rate: 6.9%annual interest rate: 6.9% loan term in months: 24 monthsloan term in months: 24 months
UnknownsUnknowns monthly payment ( $698.77)monthly payment ( $698.77)
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Choice: Two year Loan @ 6.9%Choice: Two year Loan @ 6.9% Loan Cost = Principal + Interest = $16,771Loan Cost = Principal + Interest = $16,771
principal = loan =$15,623principal = loan =$15,623 interest = $1,148interest = $1,148
Resale Value After 2 YearsResale Value After 2 Years 0.73*$18,545 = $13,5380.73*$18,545 = $13,538
foregone interest on $2137: $294foregone interest on $2137: $294 total cost = $5,664total cost = $5,664
$16,771 - $13,538 + $294$16,771 - $13,538 + $294
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Cost of Using a ‘96 Taurus for 2 Yrs.Cost of Using a ‘96 Taurus for 2 Yrs.
Cost item Cash Lease Loanforegone interest $2,450 $294 $294depreciation $4,222total drive-off $2,137monthly payments $7,428*down payment $2,137monthly payments -blue book**
$3,233
total $6,672 $9,679 $5,664
* residual value: $11,480
** blue book: $13,538
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Summary - Vocabulary - ConceptsSummary - Vocabulary - Concepts opportunity costopportunity cost depreciationdepreciation interest on principalinterest on principal leaselease loanloan services of a carservices of a car
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SCARCITY AND PRODUCTION POSSIBILITY CURVESSCARCITY AND PRODUCTION POSSIBILITY CURVES
Production Possibility CurveProduction Possibility Curve
A visual representation of tradeoffs that A visual representation of tradeoffs that arise in an economy that produces two arise in an economy that produces two goods.goods.
A picture of the choices which A picture of the choices which cancan be be made when considering the production made when considering the production of two goods.of two goods.
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PRODUCTION POSSIBILITY CURVE(FRONTIER)
PRODUCTION POSSIBILITY CURVE(FRONTIER)
A production possibility curve shows how A production possibility curve shows how all of an economies available resources all of an economies available resources can be used to produce various can be used to produce various combinations of goods and services.combinations of goods and services.
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WHAT ARE RESOURCES?WHAT ARE RESOURCES?WHAT ARE RESOURCES?WHAT ARE RESOURCES? LaborLabor
-- human effort used to produce-- human effort used to produce Production facilities (PHYSICAL CAPITAL)Production facilities (PHYSICAL CAPITAL)
-- factories, offices, stores, restaurants-- factories, offices, stores, restaurants
• • Human CapitalHuman Capital
-- knowledge and skills acquired by workers-- knowledge and skills acquired by workers Natural Resources (LAND)Natural Resources (LAND)
-- things created by acts of nature and used -- things created by acts of nature and used to produceto produce
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YY
XX
ThousandsThousandsofofcomputers computers per yearper year
Number of Space Missions Per YearNumber of Space Missions Per Year
GRAPHING POSSIBILITIES
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YY
XX
ThousandsThousandsofofcomputers computers per yearper year
Number of Space Missions Per YearNumber of Space Missions Per Year
PRODUCTION POSSIBILITYPRODUCTION POSSIBILITYCURVECURVE
GRAPHING POSSIBILITIES
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YY
XX
ThousandsThousandsofofcomputers computers per yearper year
Number of Space Missions Per YearNumber of Space Missions Per Year
380380
44
ee
PRODUCTION POSSIBILITYPRODUCTION POSSIBILITYCURVECURVE
GRAPHING POSSIBILITIES