GOAL OF ECONOMICS FOR THE INDIVIDUAL

1. GOAL OF ECONOMICS FOR THE INDIVIDUAL MAXIMIZE HAPPINESS: “UTILITY” SUBJECTIVE AS TO WHAT COMPOSES A PERSON’S “UTILITY FUNCTION” * RESOURCES * LEISURE * OTHER PERSON’S UTILITY * GLOBAL GOALS

2. HOW MUCH SHOULD YOU “SEARCH” FOR HAPPINESS? TIME LOOKING FOR LOWEST GAS PRICE TIME LOOKING FOR BEST APARTMENT TIME LOOKING FOR BEST JOB TIME LOOKING FOR PERFECT MATE SEARCH INVOLVES TIME (AND SOMETIMES, MONEY) COSTS OPPORTUNITY COST OF SEARCH (WEB INFORMATION HAS REDUCED)

3. THE DEMAND CURVE “WANTS” AND “NEEDS” – WHAT YOU’D LIKE TO HAVE NOT RECOGNIZING PRICE “DEMAND” – HOW MUCH YOU BUY AT A GIVEN PRICE COMPARE THE SUBJECTIVEVALUE YOU DERIVE TO PRICE

4. CONCEPT OF “MARGINAL VALUE” – WHY WE BUY MORE WHEN PRICE FALLS ADDITIONAL AMOUNTS OF SOMETHING ARE WORTH LESS TO US THAN EARLIER AMOUNTS AT $3/GALLON, 20TH GALLON IS JUST WORTH $3 TO MARY TO BUY 21ST GALLON, PRICE WOULD HAVE TO FALL TO $2.90

5. ILLUSTRATES THE IDEA OF “MARGINAL DECISION-MAKING” MOST OR OUR DECISIONS INVOLVE SMALL CHANGES – BUY ONE MORE GALLON OF GAS; SPEND ONE MORE HOUR STUDYING COMPARE BENEFITS OF BUYING ONE MORE GALLON OF GAS TO BENEFITS OF SPENDING THAT MONEY IN ANOTHER WAY COMPARE BENEFITS OF STUDYING ONE MORE HOUR TO BENEFITS OF USING THAT HOUR IN ANOTHER WAY

6. IDEA OF CONSUMER SURPLUS IF BUY AT SAME PRICE PER UNIT FOR ALL UNITS, THEN GET A “BARGAIN” ON EARLIER UNITS WHERE WILLING TO PAY MORE IN EXAMPLE, WHEN PRICE IS $5, CONSUMER SURPLUS IS $4+$3+$2+$1=$10

7. SELLERS TRY TO “EXTRACT” CONSUMER SURPLUS CHANGING FEATURES OF PRODUCT SO NOT SAME TO ALL DIVIDING BUYERS INTO DIFFERENT GROUPS (MARKET SEGMENTATION – MORE LATER) ULTIMATE EXAMPLES – HOME AND CAR BUYING – UNIQUE PRICE TO EACH BUYER

8. ANOTHER EXAMPLE IS TWO-PART PRICING FIRST PART – PAY AN ENTRANCE FEE SECOND PART – PAY FOR NUMBER OF UNITS EXAMPLES AMUSEMENT PARKS BIG-BOX STORES

9. CAUTIONS ON COMPARING PRICES MOST PRICES INVOLVE TRADE-OFFS THE ADAGE “TOO GOOD TO BE TRUE” IS OFTEN RELEVANT FOR PRICES * SAME PRODUCT CHARACTERISTICS? * SERVICE CONTRACTS, DELIVERY? * WARRENTIES? * PAY NOW VERSUS PAY LATER?

10. IMPACT OF INCOME ON HOW MUCH WE BUY “NORMAL GOOD” – HIGHER INCOME PERSON BUYS MORE AT EVERY PRICE “INFERIOR GOOD” – HIGHER INCOME PERSON BUYS LESS AT EVERY PRICE * SECOND HAND CLOTHES * FAST FOOD * USED VEHICLES

11. EXAMPLES OF NORMAL AND INFERIOR GOODS MIKE MARY ($20,000) ($150,000) Fast food burgers per month 20 3 Pairs of new shoes per year 1 15

12. PRICE OF COMPLEMENTS COMPLEMENTS – PRODUCTS THAT YOU LIKE TO CONSUME TOGETHER - BACON AND EGGS PRICE OF BACON UP, EAT LESS BACON AND EAT LESS EGGS PRICE OF BACON DOWN – EAT MORE BACON AND EAT MORE EGGS

13. PRICE OF SUBSTITUTES SUBSTITUTES – PRODUCT THAT CAN USE IN PLACE OF ANOTHER - CHICKEN AND BEEF PRICE OF CHICKEN UP – EAT LESS CHICKEN AND EAT MORE BEEF PRICE OF CHICKEN DOWN – EAT MORE CHICKEN AND EAT LESS BEEF

14. IMPORTANCE OF LOCATION TO PRODUCT PRICE CONSUMERS ARE WILLING TO PAY MORE FOR PRODUCTS SOLD IN MORE CONVENIENT LOCATIONS -- HOUSING -- GAS MORE EXPENSIVE AT CONVENIENTLY LOCATED STATIONS

15. PREFERENCES PERSONAL “LIKES” AND “DISLIKES” I’LL BUY MORE TIES THAN YOU AT ANY PRICE YOU’LL BUY MORE FLIP-FLOPS THAN ME AT ANY PRICE ROLES OF ADVERTISING, AGE, PEERS

16. CREDIT AND BUYING USING CREDIT (BORROWING) CAN INCREASE YOUR ABILITY TO SPEND TODAY EFFECTIVELY BORROWING AGAINST FUTURE INCOME CONCERN – ABILITY TO REPAY IN FUTURE WILL ALWAYS PAY MORE DUE TO INTEREST CHARGES BEST USED FOR “DURABLE” PRODUCTS AND INVESTMENTS – SOMETHING THAT HAS FUTURE BENEFITS

17. SMART BUYING CONSIDER WHAT CAN BUY WITH SAME MONEY (OPPORTUNITY COST) CONSIDER CURRENT AND FUTURE COSTS - VEHICLE – PURCHASE PRICE AND ANNUAL OPERATING COSTS PAY MORE NOW TO SAVE LATER? – HOW JUDGE (MORE LATER) BUY “OFF-PEAK” (OUT-OF-SEASON) TO SAVE WAIT – PRICE LOWER IN FUTURE?

18. TIME AND MONEY VALUE OF MONEY DEPENDS ON AMOUNT AND WHEN IT’S PAID OR RECEIVED USUALLY, PRICES ARE HIGHER IN THE FUTURE AND LOWER IN THE PAST SO DOLLARS IN PAST ARE WORTH MORE – GREATER PURCHASING POWER THAN DOLLARS TODAY

19. DEFINITIONS “NOMINAL DOLLARS” - “ACTUAL” DOLLAR AMOUNTS, UNADJUSTED FOR PURCHASING POWER “REAL DOLLARS” – DOLLARS ADJUSTED FOR PURCHASING POWER CONVENTION – EXPRESS DOLLARS IN THEIR PURCHASING POWER OF THE CURRENT YEAR (2014)

20. USE PRICE INDICES TO SHOW HOW PURCHASING POWER OF DOLLAR HAS CHANGED EXAMPLE: CONSUMER PRICE INDEX VALUE OF 100 IN 1983 VALUE OF 218 TODAY(2014) MEANS TAKES $2.18 TODAY TO PURCHASE WHAT $1.00 BOUGHT IN 1983 THEREFORE, IF EARNED $10,000 IN 1983, WOULD BE THE SAME AS EARNING $21,800 TODAY. SAYING THE SAME THING, THE “PURCHASING POWER” OF $10,000 IN 1983 IN “2014 DOLLARS” IS $21,800

21. THE GENERAL FORMULA FOR CALCULATING THE PURCHASING POWER - IN TODAY’S DOLLARS – OF PAST DOLLARS PAST DOLLAR X (CPI TODAY/CPI PAST YEAR) AMOUNT RUSS EARNED $50,000 IN 2000; WHAT’S THE PURCHASING POWER TODAY – IN 2014 – OF THAT SALARY? CPI 2000 = 172 CPI 2014 = 218 $50,000 X (218/172) = $63,372 $50,000 IS THE “NOMINAL” SALARY $63,372 IS THE “REAL” SALARY

22. MULTIPLE APPLICATIONS CONVERT SALARIES, PRICES, COSTS, PROFITS, ETC. CAN CONVERT AND COMPARE NOMINAL $ THAT START AT DIFFERENT YEARS PURCHASING POWER OF DOLLARS ALSO VARIES GEOGRAPHICALLY - SEE TABLE 2, PAGE 10 OF EVERYDAY ECONOMICS SEE WWW.BLS.GOV FOR CPI VALUES 1913, CPI = 9.8, SO A DOLLAR THEN WOULD BE WORTH (218/9.8) OR $22