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Why Understand Economics?

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  1. 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

  2. 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

  3. More Recent Currency Exchange Rates http://www.cals.ncsu.edu/course/are012/currency.pdf

  4. 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 ?

  5. 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?

  6. 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 ?

  7. 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 ?

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. Moral of this Story How expensive can an irresponsible sexual interlude be ? If you play, eventually you have to pay!

  18. 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.

  19. 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?

  20. 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?

  21. 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

  22. 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?

  23. 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

  24. 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%

  25. 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

  26. 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

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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

  32. 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”

  33. 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.

  34. 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.

  35. 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.

  36. Theory and Models • No model captures every little detail and inter-relationship that exists • Models are abstractions from reality

  37. 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.

  38. 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?

  39. 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.

  40. 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

  41. 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.

  42. 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.

  43. The Consumption-Production Model In Equilibrium: PRICE CONSUMPTION = PRODUCTION INVENTORIES

  44. In Disequilibrium: P C < Pr Iv How should a manager respond in this case?

  45. In Disequilibrium: • What if production process is at full capacity? • What if production process is at less than full capacity?

  46. In Disequilibrium: P C > Pr Iv How should a manager respond in this case?

  47. In Disequilibrium: • What if production process is at full capacity? • What if production process is at less than full capacity?

  48. 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