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Introduction to Economics Outline: Lecture One

Introduction to Economics Outline: Lecture One. Information About the Course Elements of Personal Finance Buying or Leasing a Car. Economics 109 Llad Phillips Fall 1998 Introduction to Economics Hour, Location: 2:00-3:15, Phelps 1260 Instructor: Llad Phillips

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Introduction to Economics Outline: Lecture One

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  1. Introduction to EconomicsOutline: Lecture One • Information About the Course • Elements of Personal Finance • Buying or Leasing a Car

  2. Economics 109 Llad Phillips Fall 1998 Introduction to Economics Hour, Location: 2:00-3:15, Phelps 1260 Instructor: Llad Phillips Office Hours: NH 3032, 9:30-10:15 TuTh and 3:30-3:50 TuTh, and by appointment, Texts: Kenneth Morris and Alan Siegel,The Wall Street Journal Guide to Understanding Personal Finance, Revised(1997) Arthur O’Sullivan and Steven Sheffrin, Economics, Principles and Tools(1998)

  3. Labs(sections) in the Micro Computer Lab(MCL) 11189 F 9:00-9:50 P333 Lab, Phelps 1526, JD 11197 M 7:00-7:50 PM P333 Lab, Phelps 1526, JA 11205 W 8:00-8:50 P333 Lab, Phelps 1526, JD 11213 M 5:00-5:50 PM P200 Lab, Phelps 1525, JA 62646 T 4:00-4:50 PM P333 Lab, Phelps 1526, LP TH4:00-4:50 PM P333 Lab, Phelps 1526, LP Teaching Assistants: Joshua Anderson, Office Hours: NH 2036 Th 3:30-4:30, F 3-4;John Davis, Office Hours: NH 2032 Th 1-2, F 10-11 Exams: Quiz: Thursday, Oct. 15,. You will need a scantron sheet and a #2 pencil Midterm: Tuesday, Nov. 3, 2:00-3:15 PM. Scantron & #2 Final: Tuesday, Dec. 8, 4:00-7:00 PM, Scantron & #2

  4. Problem Assignments: At least half of the questions on the 25 minute quiz will be from the assigned problems. 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/econ109

  5. Lecture Topics and Reading List Part One Personal Finance: Economics in Everday Life 1. Tuesday Sept. 29, Lecture One: "Choosing a method to finance a car" Buying or Leasing a car The choice between: paying cash leasing buying on time

  6. Reading Assignment: Guide to Understanding Personal Finance, Ch. 2, "Credit" 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.14: 1, 2, 3, 4, 5. p. 21: 1, 2, 3, 4, 5, 6

  7. Introduction to Economics Elements of Personal Finance

  8. Elements of Personal Finance • Economics in every day life • buying or leasing a car • buying or renting a home • personal financial planning • managing personal investments • managing a household budget • determinants of personal income

  9. Buying or Leasing a Car • Your choice of vehicle • Is it what you need? • Is it what you want? • Is it what you can afford? • Loss of value through depreciation of your car • physical wear and tear • decrease in resale value: paying a premium for newness

  10. Economic Concept: Consumer Durable, e.g. car, refrigerator • perishable good: strawberries • experience with Farmers’ Markets • Haymarket Square in Boston • Why did institutional buyers, such as convents, buy on late Saturday afternoons? • durable good: car • resale value declines each year • How does this affect choice of which car to buy?

  11. Sources of Information • Kelley Blue Book: Used Car Guide • bookstores • Kelley Blue Book: Internet • Universal Resource Locator(URL) • http://www.kbb.com/ • Manufactuters • Nissan • http://www.nissan-usa.com/

  12. Kelley Blue Book

  13. Kelley Blue Book

  14. Kelley Blue Book

  15. http://www.nissan-usa.com/

  16. Economic Decision Making • choice of a vehicle • Nissan Altima XE 4-Dr Sedan • Ford Taurus 4-Dr Sedan • choice of payment method • cash • lease • payment plan

  17. Economists Assume You Know What You Like • Lingo: economists call these consumer tastes or consumer preferences

  18. Economists Assume You Can make Comparisons • example 1996 Altima vs. 1996 Ford Taurus • compare specifications or attributes • we know price for a bundle of attributes • e.g. horsepower, miles per gallon, etc. • dealer invoice (with destination charge) • Altima: $14,641 • Taurus: $17,171 • manufacturer’s suggested retail price (MSRP) • Altima: $16,219 • Taurus: $18,545

  19. Economists Assume You Can Make Tradeoffs • Do you prefer a Ford Taurus or an Altima plus $2,326 = $18,545 - $16,219 ? • If you prefer the Ford, then you buy the Taurus • If you prefer the Nissan plus the cash, then you buy the Altima • If you are indifferent between these two options or bundles of goods ( car plus cash), then you might buy either one

  20. Economics Framework: Converting Data Into Useful Information for Decisions Kelley’s Prices Data Nissan’s Specs Framework “Your Tastes” Decision: Choice of Vehicle Information

  21. Economics Framework: Converting Data Into Useful Information for Decisions ? Data ? Framework Decision: Choice of Payment Information

  22. Choice of Payment Method • cash • lease • loan

  23. http://www.fordcredit.com/nafo/rcl/agreement.html

  24. Walnut Creek Dealer: 1996, Ford Taurus, $16,488 Example  5,976 + tax 249 + tax 

  25. Example 249 + tax 24 months 5,976 + tax

  26. Depreciation: Taurus, GL Sedan

  27. Choice: cash • purchase price: $16,488 • tax at 7.5 %: $1,237 • documents: $35 • total: $17,760

  28. This Year Next Year Year After Keep Your Money $17,760 $17,760 $17,760 $1,225* $1,225 $1,225 $17,760 $18,985 $20,210 * @ 6.9 % interest Buy The Car, Cash Car’s Services For 1 Yr. Car’s Services For 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.)

  29. Note: • The first years cost: • $18,985 - $14,947 = $4,038 • (principal + interest) -depreciation = principal - (depreciation - interest) • this expression explains the final cost of paying cash in Morris & Siegel, Guide to Understanding Personal Finance, pp. 36-37, in Revised and Updated version, pp. 48-49.

  30. Economic Principles • A dollar today is not the same as a dollar tomorrow! • $10 today @ 6.9% = $10 * 1.069 next year • The “opportunity cost” of spending your money is the foregone interest. • The cost of buying the services of the car, neglecting operating costs: • depreciation: owning a new car • foregone interest

  31. Economics Framework: Converting Data Into Useful Information for Decisions ? Data ? Framework: Depreciation Foregone Interest Decision: Choice of Payment Information

  32. Choice: Lease • drive-off costs(payments due at lease signing): $2,136.77 • total of 24 monthly payments: $7248 = 24 months * $302 per month • monthly Payment: $249 + tax • tax + documents = $1237 + $35 = $1272, or $53 per month • total: $9384.77

  33. Buy The Car, Cash This Year Next Year Year After foregone interest on $17,760: $1,225* $2,450 depreciation: $2,813# $4,222 * @ 6.9 % interest $4,038 $6,672 # price+tax-blue book = $17,760 - 0.806*$18,545 Lease, 24 months total drive-off: $2,137 $2,137 total monthly payments @$302/m.: $3,624 $7,248 $147 $294 foregone interest on $2,137**: $5908 $9679 ** Assumes no opportunity cost of monthly payments

  34. Example: Buying a New ‘96 Taurus: Advertised Price $16488 • Knowns • advertised price + tax + documents: $17,760 • down payment: $2,137 • loan amount: $15,623 • loan amount = $17,760 - $2,137 • annual interest rate: 6.9% • loan term in months: 24 months • Unknowns • monthly payment ( $698.77)

  35. Choice: Two year Loan @ 6.9% • Loan Cost = Principal + Interest = $16,771 • principal = loan =$15,623 • interest = $1,148 • Resale Value After 2 Years • 0.73*$18,545 = $13,538 • foregone interest on $2137: $294 • total cost = $5,664 • $16,771 - $13,538 + $294

  36. Cost of Using a ‘96 Taurus for 2 Yrs. * residual value: $11,480 ** blue book: $13,538

  37. Summary - Vocabulary - Concepts • opportunity cost • depreciation • interest on principal • lease • loan • services of a car

  38. http://www/latimes.com

  39. SCARCITY AND PRODUCTION POSSIBILITY CURVES • Production Possibility Curve A visual representation of tradeoffs that arise in an economy that produces two goods. A picture of the choices which can be made when considering the production of two goods.

  40. PRODUCTION POSSIBILITY CURVE(FRONTIER) A production possibility curve shows how all of an economies available resources can be used to produce various combinations of goods and services.

  41. WHAT ARE RESOURCES? • Labor -- human effort used to produce • Production facilities (PHYSICAL CAPITAL) -- factories, offices, stores, restaurants • Human Capital -- knowledge and skills acquired by workers • Natural Resources (LAND) -- things created by acts of nature and used to produce

  42. GRAPHING POSSIBILITIES

  43. Y GRAPHING POSSIBILITIES X

  44. Y GRAPHING POSSIBILITIES Thousands of computers per year X Number of Space Missions Per Year

  45. Y GRAPHING POSSIBILITIES PRODUCTION POSSIBILITY CURVE Thousands of computers per year X Number of Space Missions Per Year

  46. Y GRAPHING POSSIBILITIES PRODUCTION POSSIBILITY CURVE Thousands of computers per year e 380 X 4 Number of Space Missions Per Year

  47. Y GRAPHING POSSIBILITIES PRODUCTION POSSIBILITY CURVE Thousands of computers per year e 380 f 300 X 4 5 Number of Space Missions Per Year

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