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Introduction to Economics

Introduction to Economics. Elements of Personal Finance. Econ 109 Class Page. Econ Home Page: http://www.econ.ucsb.edu. Labs(sections) 12617 F 9:00-9:50 AM Jalama Lab, Phelps 1517 MCL 12625 M 2:00-2:50 PM Miramar Lab, Phelps 1526 12633 M 7:00-7:50 PM Miramar Lab, Phelps 1526

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Introduction to Economics

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  1. Introduction to Economics Elements of Personal Finance

  2. Econ 109 Class Page • Econ Home Page:http://www.econ.ucsb.edu

  3. Labs(sections) • 12617 F 9:00-9:50 AM Jalama Lab, Phelps 1517 • MCL 12625 M 2:00-2:50 PM Miramar Lab, Phelps 1526 • 12633 M 7:00-7:50 PM Miramar Lab, Phelps 1526 • 12641 W 8:00-8:50 AM Miramar Lab, Phelps 1526 • 12658 T 6:30- 7:20 PM Miramar Lab, Phelps 1526 • 12666 F 1:00-1:50 PM Ledbetter Lab, Phelps 1530 Checking Instructional Computing Lab Scedules http://www.ic.ucsb.edu/faculty/labs/

  4. Announcements • E-mail addresses • Llad Phillips <llad@econ.ucsb.edu> • Donghun Cho<cho@econ.ucsb.edu> • Taeil Kang<kang@econ.ucsb.edu> • Kirk Lesh<lesh@econ.ucsb.edu>

  5. Course Grading If you complete over 70 % of both the text Problems and Lab Exercises, then your course grade is increased by 1/3 grade point

  6. Economics in the News • What can we learn from the newspaper?

  7. Bond Market Demand for Funds Interest Rate On Bonds Supply of Funds Quantity of Funds, $

  8. Bond Market Shift in the Supply of Funds Demand for Funds Interest Rate On Bonds Quantity of Funds, $

  9. Background on US Labor ForceDefinitions • Civilian non-institutional population: those not in hospitals, jails etc. • civilian non-institutional population is either in the labor force (working or looking for work) or not in the labor force • civilian labor force participation rate is the proportion of the civilian noninstitutional population in the labor force

  10. U S Statistical Abstract http://www.census.gov/prod/www/statistical-abstract-us.html

  11. Background on the US Labor MarketCivilian Labor Force Participation Rate http://stats.bls.gov/

  12. MaleCivilian Labor Force Participation Rate http://stats.bls.gov/

  13. FemaleCivilian Labor Force Participation Rate http://stats.bls.gov/

  14. 16-19 Years OldCivilian Labor Force Participation Rate http://stats.bls.gov/

  15. Current Economic Events % of Civilian Labor Force That Is Unemployed

  16. Lecture Four • Some people in class do not work, but study • Some people in class work and study • Some of your friends may work full time and not study What is the story?

  17. 4. Tuesday, Oct 8, Lecture Four: "Markowitz Efficiency Portfolio Analysis" Wall Street Journal Video, Guide to Money and Markets ( on reserve in Kerr Hall) Markowitz Efficient Portfolio Analysis Reading Assignment: Money 101 “Basics of Investing” O’Sullivan and Sheffrin: Ch. 4, “Supply, Demand and Market Equilibrium” emphasis: the law of demand and market supply Problems O & S Text pp. 90-91: 1, 2, 3, 4, 5, 6, 7

  18. Outline: Lecture Four • Determinants of Personal Income (cont.) • Markowitz Efficient Portfolio Analysis • Interest rate, % per year, APR • Video Guide to Money and Markets

  19. Determinants of Personal Income • Life Cycle Model • Learning and Earning • Your Market Wage Depends on • your human capital • Allocating your time between Learning and Earning • 24 hour endowment • your tastes for learning versus earning

  20. Explaining Differences in Behavior • Different Opportunities • Different Tastes • Possibly Both

  21. Earnings Opportunities for trading leisure for earnings (income) at a rate, $20 per hour, the market wage, determined by your stock of human capital(step one of the paradigm: describing the alternatives for choice) $480 $ 0 Leisure (learning) 0 hours 24 hours

  22. $480 Savings, $ from home $ 0 0 hours 24 hours

  23. Comparative market wages as determined by accumulated knowledge Earnings $480 college grad $240 dropout $ 0 Leisure (learning) 0 hours 24 hours

  24. Choosing Between Learning and Earning • How much time for learning? • How much time for earning? • This choice, like all choices depends on your tastes • Do you want to earn and consume now? • Do you want to learn, earn more in the future, and consume more in the future?

  25. Economists Assume You Can make Comparisons • example: more leisure and less income versus less leisure and more income • recall Lecture One: an Altima Vs. a Taurus

  26. Economists Assume You Can Make Tradeoffs • How much income will you demand to give up your leisure?

  27. Depicting your tastes graphically: iso-preference or indifference curves Earnings Iso-Preference Curves: You value all points on a curve equally(step two of the paradigm: valuing the alternatives for choice) $480 $ 0 Leisure (learning) 24 hours 0 hours

  28. Depicting your tastes graphically Earnings low value Iso-Preference Curves: You value all points on a curve equally high $480 high value $ 0 Leisure (learning) 0 hours 24 hours

  29. The choice between leisure and earning now:picking the best alternative Earnings Iso-Preference Curves: You value all points on a curve equally high $480 alternatives high value low value $ 0 Leisure (learning) 0 hours 24 hours

  30. Individual’s Supply of Labor Earnings low value high $480 Optimum $180 for 9 hrs of work high value Leisure (learning) $ 0 15 hours of leisure 0 hours 24 hours

  31. low value Higher value high $480 Savings, $ from home $ 0 0 hours 24 hours

  32. low value Higher value high $480 Savings, $ from home $ 0 0 hours 24 hours

  33. Earnings low value slope of the iso-preference curve through the 24 hour endowment is the lowest wage at which you are willing to work high $480 $96 $ 0 Leisure (learning) 0 hours 24 hours dropout is unwilling to work for $4/hr

  34. Poverty in the United States • Attributable to differences in earning power • Policy: equal opportunity for education

  35. Personal Investing • Power of Compound Interest • exponential growth • Based on Doubling Your Money Every Four Years • rate of growth: 17% per year

  36. Growing Wealth at 17% per Year

  37. Growth of $31,250 at Two Different Rates 1200000 1000000 seventeenplus three 800000 Amount 600000 400000 200000 $57,000 0 0 5 10 15 20 25 Year

  38. Personal Investing • How do you choose between stocks or bonds as a personal investment? • How do you choose between mutual funds? • Are stocks and bonds too risky? Should you keep your money in cash or gold?

  39. Creed For Success • Ben Franklin: “A penny saved is a penny earned” • mind those pennies, budget and be frugal • save, I.e. tithe yourself • Diversify Your investments • cash • housing • bonds • stocks • Invest in a Stock Index Fund

  40. Dow Jones Industrials Index http://www.quicken.com

  41. Growth Rate 13% per Year

  42. Example: UC Funds • Suppose you invest up to $10,000 per year in a tax sheltered 403(b) plan • you have to save $10,000, but you would have to pay income taxes if you took it as income • UC investment alternatives • guaranteed insurance contract(GIC) • savings fund • money market fund • bond fund • stock index fund • multi-asset fund

  43. Investment Concepts • monthly return for June 2001 on an asset • price(June) - price(May) + dividends • price(June) - price(May): capital gain(loss) • dividends(interest): income from stocks(bonds) • monthly rate of return for June 2001 • [price(June) - price(May) + dividends]/price(May) • in %, multiply by 100 • annual rate: multiply by 12

  44. Example: UC Funds/Mutual Funds • Sources of information on UC funds • monthly, quarterly, annual, etc. rates of return • internet: http://www.ucop.edu/bencom/rs/perform.html • Notice, a publication of the UC Academic Senate • Source of Information on Mutual Funds • quarterly • The Wall Street Journal, Mutual Funds Quarterly Review, e.g. extra section in July 3, 1997 Journal

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