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Why Understand Economics? Big Three U.S. Automakers, and the Strong Dollar of 1986 1986: $1 ===> 240 yen 1988: $1 ===> 120 yen 1994: $1 ===> 113.58 yen 1995: $1 ===> 104.08 yen 1996: $1 ===> 108.83 yen 1997: $1 ===> 121.05 yen Why Understand Economics?

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why understand economics
Why Understand Economics?

Big Three U.S. Automakers, and the Strong Dollar of 1986

1986: $1 ===> 240 yen

1988: $1 ===> 120 yen

1994: $1 ===> 113.58 yen

1995: $1 ===> 104.08 yen

1996: $1 ===> 108.83 yen

1997: $1 ===> 121.05 yen

why understand economics2
Why Understand Economics?

Big Three U.S. Automakers, and the Strong Dollar of 1986

1986: $1 ===> 240 yen

1988: $1 ===> 120 yen

1994: $1 ===> 113.58 yen

1995: $1 ===> 104.08 yen

1996: $1 ===> 108.83 yen

1997: $1 ===> 121.05 yen

more recent currency exchange rates
More Recent Currency Exchange Rates

http://www.cals.ncsu.edu/course/are012/currency.pdf

why understand economics4
Why Understand Economics?

You can read the Wall Street Journal Article in the Library’s Electronic Reserve Room:

Click on the title of the article:

Fateful Choice: Did U.S. Car Makers Err By Raising Prices When The Yen Rose ?

why understand economics5
Why Understand Economics?

~26.5% of the U.S. Population was Born Between 1946 to 1964

“Baby Boomers”

2008: 44 to 62 years old

How will this aging of our population affect our economy in the future?

a 1993 study by prof ayers of northwestern university
A 1993 Study by Prof. Ayers of Northwestern University

165 Automobile Dealers in Chicago Area

Average Vehicle Profit

White Men $362

African-American Men $504

White Women $783

African-American Women $1237

Does this represent racial and sexual discrimination, or ?

a 1993 study by prof ayers of northwestern university7
A 1993 Study by Prof. Ayers of Northwestern University

165 Automobile Dealers in Chicago Area

Average Vehicle Profit

White Men $362

African-American Men $504

White Women $783

African-American Women $1237

Does this represent racial and sexual discrimination, or ?

average cost of raising a child in 2007
Average Cost of Raising a Child in 2007

Annual Household Expenditures On A Child

Before Tax Income Ranges

Age <$45,800 $45,800 – 77,100 > $77,100

0-2 $7,830 $10,960 $16,290

3-5 8,020 11,280 16,670

6-8 8,000 11,130 16,310

9-11 7,950 10,930 15,980

12-14 8,830 11,690 16,810

15-17 8,810 12,030 17,500

http://www.cnpp.usda.gov/Publications/CRC/crc2007.pdf

average cost of raising a child in 20079
Average Cost of Raising a Child in 2007

Annual Household Expenditures On A Child

Before Tax Income Ranges

Age <$45,800 $45,800 – 77,100 > $77,100

Total $148,320 $204,060 $298,680

Estimates based on expenditures for one child in a two-child, two-parent family, overall United States. Estimates are not adjusted for inflation.

http://www.cnpp.usda.gov/Publications/CRC/crc2007.pdf

adjustments
Adjustments:

If family has only one child, they will probably spend 24% MORE than the above amount on that child.

If family has three or more children, family will benefit from economies of scale probably spend 23% LESS on each child

http://www.cnpp.usda.gov/Publications/CRC/crc2007.pdf

adjustments11
Adjustments:

If you are a single parent, your monetary costs will be pretty close to those of two-parent families.

http://www.cnpp.usda.gov/Publications/CRC/crc2007.pdf

percentage of your income
Percentage of Your Income

High Income families usually spend more on a child,

BUT if you’re in a low income group, you probably spend a much higher percentage of your income on a child than wealthier families

http://www.cnpp.usda.gov/Publications/CRC/crc2007.pdf

percentage of your income13
Percentage of Your Income

Households in Lowest Income Group:

~29% of household income on a child

Households in Middle Income Group:

~19% of household income on a child

Households in Highest Income Group:

~14% of household income on a child

http://www.cnpp.usda.gov/Publications/CRC/crc2007.pdf

what about inflation
What About INFLATION?

Based on an annual inflation rate of 3.1%,

  • Average from 1987 to 2006

Lower Income Parents will pay $196,010

Middle Income Parents will pay $269,040

Higher Income Parents will pay $393,230

by the time the child reaches 18 years old.

http://www.cnpp.usda.gov/Publications/CRC/crc2007.pdf

n c child support formula example for 2007
N.C. Child Support Formula Example for 2007:

If have two children and earn $40,200/year gross income

~ $790/month in child support

~ $4,740 per child per year

~ $85,320 per child over 18 years

n c court system
N.C. Court System

assumes your support to be 50% of the total support,

Therefore, the state of N.C. estimates that the total cost of raising a child from 0 to 18 years in 2007 to be about:

$85,320 / .5 = $170,640

moral of this story
Moral of this Story

How expensive can an irresponsible sexual interlude be ?

If you play, eventually you have to pay!

over the three year period of 2003 to 2005
Over the three year period of 2003 to 2005:

U.S. averaged ~ 16,053 murders per year,

~43,480 deaths by auto accidents per year

http://www.cdc.gov/nchs/data/nvsr/nvsr56/nvsr56_10.pdf

Over the 10 year period of the Vietnam War, more than 60,000 Americans were killed or missing. (1965 to 1975)

In 1969, a very hot period during that war, ~53,543 Americans were killed in automobile accidents.

over the three year period of 2003 to 200519
Over the three year period of 2003 to 2005:

Of those Americans involved in automobile accidents that are not killed, how many are left disabled?

in the first persian gulf war
In the First Persian Gulf War:

35 deaths from “friendly fire”

(24% of all battle casualties)

148 battle deaths

145 “other” deaths

How long did the Gulf War last?

in the first persian gulf war21
In the First Persian Gulf War:

Bombing began 3:00 A.M., January 16, 1991 Iraqi time.

Operation Desert Storm began February 24, 1991 and ended 100 hours later

in the first persian gulf war22
In the First Persian Gulf War:

43,000 auto deaths per year / 365 days = ~118 per day

What cost do auto accidents impose on our society as a whole?

Would the U.S. govt. get a better return on our tax dollars to develop programs that would reduce auto accidents?

the recession officially ending in the middle of 1991
The Recession Officially Ending in the Middle of 1991

U.S. Unemployment

Dec. ‘92 7.3%

Dec. ‘93 7.4%

Dec. ‘94 6.5%

Dec. ‘95 5.4%

Dec. ‘96 5.3%

Dec. ‘97 4.7%

Dec. ‘98 4.4%

Dec. ‘99 4.1%

U.S. Bureau of Labor Statistics,

Civilian Labor Force, 16 yrs. and over

how is the unemployment figured
How is the Unemployment Figured?

Civilian Non-Inst. Pop. 209.935 million

Civilian Labor Force 140.742 million

Employed 134.912 million

Unemployed 5.829 million

Not in Labor Force 69.193 million

Unemp. Rate = (5.829/140.742) * 100 = 4.14%

unemployment by race
Unemployment by Race

U.S. Black Unemp. U.S. White Unemp.

Dec. ‘93 11.7% 5.8%

Dec. ‘94 9.8% 4.8%

Dec. ‘95 10.2% 4.9%

Dec. ‘96 10.5% 4.6%

Dec. ‘97 9.9% 3.9%

Dec. ‘98 7.8% 3.8%

Dec. ‘99 7.9% 3.5%

U.S. Bureau of Labor Statistics,

Civilian Labor Force, 16 yrs. and over

education and unemployment
Education and Unemployment?

Civilian Labor Force, 25 to 64 years old

Less than H.S. Grad Less than College

Year H.S. No College Bachelors Grads.

1997 10.4% 5.1% 3.8% 2.0%

1998 8.5% 4.8% 3.6% 1.8%

U.S. Bureau of Labor Statistics, unpublished data

Statistical Abstract of the U.S., 1999, Table No. 684

education and unemployment27
Education and Unemployment?

Civilian Labor Force, 25 to 64 years old

Less than H.S. Grad Less than College

Year H.S. No College Bachelors Grads.

2000 6.3% 3.4% 2.7% 1.7%

2006 6.8% 4.3% 3.6% 2.0%

www.census.gov/compendia/statab/tables/08s0609.pdf

education and unemployment28
Education and Unemployment?

White Civilian Labor Force, 25 to 64 years old

Less than H.S. Grad Less than College

Year H.S. No College Bachelors Grads.

1997 9.4% 4.6% 3.4% 1.8%

1998 7.5% 4.2% 3.2% 1.7%

U.S. Bureau of Labor Statistics, unpublished data

Statistical Abstract of the U.S., 1999, Table No. 684

education and unemployment29
Education and Unemployment?

White Civilian Labor Force, 25 to 64 years old

Less than H.S. Grad Less than College

Year H.S. No College Bachelors Grads.

2000 5.6% 2.9% 2.4% 1.6%

2006 5.9% 3.7% 3.2% 2.0%

www.census.gov/compendia/statab/tables/08s0609.pdf

education and unemployment30
Education and Unemployment?

Black Civilian Labor Force, 25 to 64 years old

Less than H.S. Grad Less than College

Year H.S. No College Bachelors Grads.

1997 16.6% 8.2% 6.1% 4.4%

1998 13.4% 8.4% 6.4% 2.1%

U.S. Bureau of Labor Statistics, unpublished data

Statistical Abstract of the U.S., 1999, Table No. 684

education and unemployment31
Education and Unemployment?

Black Civilian Labor Force, 25 to 64 years old

Less than H.S. Grad Less than College

Year H.S. No College Bachelors Grads.

2000 10.7% 6.4% 4.0% 2.5%

2006 12.8% 8.0% 6.2% 2.8%

www.census.gov/compendia/statab/tables/08s0609.pdf

theory and models
Theory and Models

Economics is a social science that makes use of similar methodology used by the “hard” sciences (biology, physics, etc.)

The “hard” sciences refer to this method as the “scientific method”, in economics we will refer to this method as the “economic method”

the scientific method
The Scientific Method

Step 1: The observation of phenomena,

Step 2: The formulation of a hypothesis

concerning the phenomena,

Step 3: Experimentation to demonstrate

the truth or falseness of the

hypothesis,

Step 4: Develop a conclusion that validates

or modifies the hypothesis.

the economic method 1
The Economic Method1

Step 1: Identify and state the problem

Step 2: Apply the relevant economic model

Step 3: Identify the solutions

Step 4: Evaluate the solutions

Step 5: Select and implement a solution

1Adaped from Mabry and Ulbrich, “Introduction to Economic

Principles, 1989.

theory and models35
Theory and Models

Models:

Simplified representations of the “real world” that we use to help us understand, explain, and predict economic events in the real world.

theory and models36
Theory and Models
  • No model captures every little detail and inter-relationship that exists
  • Models are abstractions from reality
theory and models37
Theory and Models

A Good Model should capture only the essential relationships that are sufficient to analyze a particular problem, or answer a particular question.

A Model is the guideline we follow to analyze economic problems and predict outcomes.

theory and models38
Theory and Models

Questions:

How do consumers respond when the price of a commodity changes?

What choices do they have?

What choices do they make?

theory and models39
Theory and Models

Dove season opens soon, and we want some shotgun shells.

How we will respond to a price of $10.00 per box of 25 shells?

There are probably thousands of determinants affecting how each consumer will respond to this high price.

theory and models40
Theory and Models

Many of these determinants were left out of the model we used to answer the questions above.

Our class model probably included:

  • The price of the specific commodity
  • The income of the consumer
  • The price of substitutes for the commodity
theory and models41
Theory and Models

These 3 determinants do a good job of explaining the behavior of consumers with respect to a price change. Later we will learn that there are in excess of 10 determinants that affect consumer demand.

theory and models42
Theory and Models

An economic model is nothing more than a set of definitions, assumptions, and hypotheses that are put together in a manner that expresses the relationships of certain observed events in a meaningful way.

the consumption production model
The Consumption-Production Model

In Equilibrium:

PRICE

CONSUMPTION = PRODUCTION

INVENTORIES

in disequilibrium
In Disequilibrium:

P

C < Pr

Iv

How should a manager respond in this case?

in disequilibrium45
In Disequilibrium:
  • What if production process is at full capacity?
  • What if production process is at less than full capacity?
in disequilibrium46
In Disequilibrium:

P

C > Pr

Iv

How should a manager respond in this case?

in disequilibrium47
In Disequilibrium:
  • What if production process is at full capacity?
  • What if production process is at less than full capacity?
short run vs long run
Short Run vs. Long Run?
  • Short Run1: a period of time that is not long enough to allow change to certain economic conditions that a decision maker may face.
  • Long Run1: a period of time long enough for all important information and choices to be available to a decision maker

1Mabry and Ulbrich, “Introduction to Economic Principles, 1989