Understanding Personal Finances and Goals and Basic Economic Principles

1. Understanding Personal Finances and Goals and Basic Economic Principles

2. Next Generation Science / Common Core Standards Addressed! • CCSS. Math Content HSSIC.B.6 - Evaluate reports based on data. • CCSS Math Content HSSID A.2 - Use statistics appropriate to the shape of the data distribution to compare center (median, mean) and spread (interquartile range, standard deviation) of two or more different data sets.

3. Agriculture, Food and Natural Resource Standards Addressed! • CRP.01.02 Evaluate and consider the near-term and long-term impacts of personal and professional decisions on employers and community before taking action. • CRP.01.02.01.c. Make and defend personal decisions after analyzing their near- and long term impacts.

4. Bell Work / Student Learning Objectives • Explain the Law of Supply. • Explain the Law of Demand. • Explain the relationship between supply and demand. • Explain the time value of money. • Explain the difference between compounding and discounting.

5. Capital Competitive enterprises Complementary enterprises Equilibrium Law of diminishing returns Labor Land Law of Demand Law of Supply Management Marginal Cost Marginal return Resource Terms

6. Terms • Supplementary enterprise • Compound interest • Compounding • Discounting • Interest Rate • Simple Interest • Time value of money

7. Interest Approach • How much money do you spend in a week? • How do you decide what purchases to make? • If you deposited $ 5,000.00 at 5.5% interest at age 15, how much would it be worth at age 65?

8. Resource is an item used to produce a product or service. • Land • Capital • Labor • Management

9. Land is a resource that includes everything in nature used in production. • Soil • Minerals • Wildlife

10. Capital includes things used in production that are man-made. • Cash • Equipment • Buildings • Supplies

11. Labor is the physical energy supplied by humans.

12. Management is the decision making function of the business.

13. Law of Supply • The Law of Supply states that when the price of a product is lowered, with no change in other factors, less of the product will be supplied.

14. Factors Affecting the Supply • Technology affects supply. • Generally, technology decreases the cost of production, making it cheaper to produce the product. • The rate that technology advances is not constant.

15. Factors Affecting the Supply • Costs of production affects supply. • When prices of inputs change, the level of production often changes. • Generally, producers try to sell products for at least as much as the total cost of all the inputs.

16. Factors Affecting the Supply • Price of other products affects supply. • If a firm can produce a different product that is priced higher, it may change production to capitalize on higher profits.

17. Factors Affecting the Supply • Price of other products affects supply. • Sometimes it is unfeasible to shift fixed assets to produce different products, i.e. removing an orchard to take advantage of higher corn prices.

18. Factors Affecting the Supply • Seasonal and cyclical production affects supply. • Some cycles of production are uncontrollable, i.e. time required for livestock to reproduce, time needed for plants to bear fruit. • Certain fruits and vegetables are considerably cheaper when “in-season”.

19. Law of Demand • The Law of Demand states that when the price of a product is increased with no change in other factors, less product will be purchased.

20. Factors Affecting Demand • Size of population affects demand. • With higher population more product will be needed. • All other things constant, demand is increased as population increases.

21. Factors Affecting Demand • Tastes and preferences of consumers affects demand. • Tastes and preferences change with time and other factors. • Weather affects preferences, (i.e. coats in the winter, barbecue foods in the summer).

22. Factors Affecting Demand • Income and distribution of wealth affects demand. • Generally, higher income results in more products being purchased. • More luxury items are purchased as incomes increase.

23. Factors Affecting Demand • Relative prices of all goods and services affect demand. • With a limited budget, decisions to buy an item directly affects the amount of another item that can be purchased.

24. Factors Affecting Demand • Relative prices of all goods and services affect demand. • When the price of a substitute item decreases, consumers will purchase more of the substitute. • When the price of a complement (items used together) decreases, more of the item will be purchased.

25. Relationship between Supply and Demand • Interaction of supply and demand determines price. • Price is found at equilibrium, where the supply and demand curves intersect. • If demand curve shifts right, the price increases.

26. Relationship between Supply and Demand • Interaction of supply and demand determines price. • If supply curve shifts left, the price increases. • Foreign trade is a major player in price determination of agricultural commodities.

27. Principle of Diminishing Returns • Law of Diminishing Returns affects physical output and economic returns. • The law of diminishing returns states that as a variable resource is added to fixed resources, marginal output declines immediately or after an initial stage of increasing marginal returns.

28. Principle of Diminishing Returns • Total output may increase at an increasing rate for a time, but then increases at a decreasing rate until it reaches its maximum.

29. Principle of Diminishing Returns • Values need to be provided to understand the law of diminishing economic returns. • The additional cost of each unit of input is called marginal cost. • The additional return resulting from each unit of input is called marginal returns. • Net returns will be highest when marginal cost is equal to marginal return.

30. Principle of Equimarginal Returns • The Principle of Equimarginal Returns states that to allocate a resource among several alternative uses in such a way that the marginal returns are equal in all uses.

31. Principle of Equimarginal Returns • Never invest capital in an alternative that does not provide returns equal to or greater than the amount invested. • Always invest capital in the option that provides the greatest marginal returns, so long as the returns are greater than the amount invested.

32. Relationship between Enterprises • Many businesses combine several enterprises to maximize profits. • Supplementary enterprises are those where one enterprise supplements the income of another. • A sports stadium is often used for concerts. • A lawn tractor can be used to move snow.

33. Relationship between Enterprises • Complementary enterprises are those where one enterprise produces the inputs for another. • Soybeans used in rotation to leave nitrogen for corn. • A tree trimming service may sell mulch.

34. Relationship between Enterprises • Competitive enterprises are those where one enterprise interferes with another. • Enterprises competing for labor resources. • Students who work so much that they do not have enough time to study.

46. Review/Summary • What resources are needed for a agricultural businesses? • Define the Law of Supply and Demand. • What is the relationship between supply and demand? • Explain the Law of Diminishing Returns. • Explain the principle Equimarginal Returns. • Identify the relationship between enterprises.

47. Review/Summary • Explain the time value of money. • Explain the concept of compounding • Explain the concept of discounting.

48. The End!