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Introduction to Economics Outline: Lecture One. Information About the Course Elements of Personal Finance Buying or Leasing a Car. Economics 109 Llad Phillips Fall 1998 Introduction to Economics Hour, Location: 2:00-3:15, Phelps 1260 Instructor: Llad Phillips
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Introduction to EconomicsOutline: Lecture One • Information About the Course • Elements of Personal Finance • Buying or Leasing a Car
Economics 109 Llad Phillips Fall 1998 Introduction to Economics Hour, Location: 2:00-3:15, Phelps 1260 Instructor: Llad Phillips Office Hours: NH 3032, 9:30-10:15 TuTh and 3:30-3:50 TuTh, and by appointment, Texts: Kenneth Morris and Alan Siegel,The Wall Street Journal Guide to Understanding Personal Finance, Revised(1997) Arthur O’Sullivan and Steven Sheffrin, Economics, Principles and Tools(1998)
Labs(sections) in the Micro Computer Lab(MCL) 11189 F 9:00-9:50 P333 Lab, Phelps 1526, JD 11197 M 7:00-7:50 PM P333 Lab, Phelps 1526, JA 11205 W 8:00-8:50 P333 Lab, Phelps 1526, JD 11213 M 5:00-5:50 PM P200 Lab, Phelps 1525, JA 62646 T 4:00-4:50 PM P333 Lab, Phelps 1526, LP TH4:00-4:50 PM P333 Lab, Phelps 1526, LP Teaching Assistants: Joshua Anderson, Office Hours: NH 2036 Th 3:30-4:30, F 3-4;John Davis, Office Hours: NH 2032 Th 1-2, F 10-11 Exams: Quiz: Thursday, Oct. 15,. You will need a scantron sheet and a #2 pencil Midterm: Tuesday, Nov. 3, 2:00-3:15 PM. Scantron & #2 Final: Tuesday, Dec. 8, 4:00-7:00 PM, Scantron & #2
Problem Assignments: At least half of the questions on the 25 minute quiz will be from the assigned problems. Due at the next Lab(section). Standing Assignment: Read the business section of the Los Angeles Times Course Home Page: http://www.econ.ucsb.edu/econ109
Lecture Topics and Reading List Part One Personal Finance: Economics in Everday Life 1. Tuesday Sept. 29, Lecture One: "Choosing a method to finance a car" Buying or Leasing a car The choice between: paying cash leasing buying on time
Reading Assignment: Guide to Understanding Personal Finance, Ch. 2, "Credit" O’Sullivan and Sheffrin: Ch.1, “Introduction: What is Economics?” emphasis: concepts of scarcity and production possibilities curve O’Sullivan and Sheffrin: Appendix to Ch.1, “Using Graphs and Formulas” Problems O & S Text: p.14: 1, 2, 3, 4, 5. p. 21: 1, 2, 3, 4, 5, 6
Introduction to Economics Elements of Personal Finance
Elements of Personal Finance • Economics in every day life • buying or leasing a car • buying or renting a home • personal financial planning • managing personal investments • managing a household budget • determinants of personal income
Buying or Leasing a Car • Your choice of vehicle • Is it what you need? • Is it what you want? • Is it what you can afford? • Loss of value through depreciation of your car • physical wear and tear • decrease in resale value: paying a premium for newness
Economic Concept: Consumer Durable, e.g. car, refrigerator • perishable good: strawberries • experience with Farmers’ Markets • Haymarket Square in Boston • Why did institutional buyers, such as convents, buy on late Saturday afternoons? • durable good: car • resale value declines each year • How does this affect choice of which car to buy?
Sources of Information • Kelley Blue Book: Used Car Guide • bookstores • Kelley Blue Book: Internet • Universal Resource Locator(URL) • http://www.kbb.com/ • Manufactuters • Nissan • http://www.nissan-usa.com/
Economic Decision Making • choice of a vehicle • Nissan Altima XE 4-Dr Sedan • Ford Taurus 4-Dr Sedan • choice of payment method • cash • lease • payment plan
Economists Assume You Know What You Like • Lingo: economists call these consumer tastes or consumer preferences
Economists Assume You Can make Comparisons • example 1996 Altima vs. 1996 Ford Taurus • compare specifications or attributes • we know price for a bundle of attributes • e.g. horsepower, miles per gallon, etc. • dealer invoice (with destination charge) • Altima: $14,641 • Taurus: $17,171 • manufacturer’s suggested retail price (MSRP) • Altima: $16,219 • Taurus: $18,545
Economists Assume You Can Make Tradeoffs • Do you prefer a Ford Taurus or an Altima plus $2,326 = $18,545 - $16,219 ? • If you prefer the Ford, then you buy the Taurus • If you prefer the Nissan plus the cash, then you buy the Altima • If you are indifferent between these two options or bundles of goods ( car plus cash), then you might buy either one
Economics Framework: Converting Data Into Useful Information for Decisions Kelley’s Prices Data Nissan’s Specs Framework “Your Tastes” Decision: Choice of Vehicle Information
Economics Framework: Converting Data Into Useful Information for Decisions ? Data ? Framework Decision: Choice of Payment Information
Choice of Payment Method • cash • lease • loan
Walnut Creek Dealer: 1996, Ford Taurus, $16,488 Example 5,976 + tax 249 + tax
Example 249 + tax 24 months 5,976 + tax
Choice: cash • purchase price: $16,488 • tax at 7.5 %: $1,237 • documents: $35 • total: $17,760
This Year Next Year Year After Keep Your Money $17,760 $17,760 $17,760 $1,225* $1,225 $1,225 $17,760 $18,985 $20,210 * @ 6.9 % interest Buy The Car, Cash Car’s Services For 1 Yr. Car’s Services For 2 Yrs. Resale value: $14,947** $13,538# ** MSRP - Depreciation = MSRP - MSRP * 0.194 = $18,545 * 0.806 # MSRP - Depreciation = MSRP - MSRP * 0.27 = $18,545 * 0.73 Cost of Car’s Services: $4,038(1 Yr.) & $6,672(2 Yrs.)
Note: • The first years cost: • $18,985 - $14,947 = $4,038 • (principal + interest) -depreciation = principal - (depreciation - interest) • this expression explains the final cost of paying cash in Morris & Siegel, Guide to Understanding Personal Finance, pp. 36-37, in Revised and Updated version, pp. 48-49.
Economic Principles • A dollar today is not the same as a dollar tomorrow! • $10 today @ 6.9% = $10 * 1.069 next year • The “opportunity cost” of spending your money is the foregone interest. • The cost of buying the services of the car, neglecting operating costs: • depreciation: owning a new car • foregone interest
Economics Framework: Converting Data Into Useful Information for Decisions ? Data ? Framework: Depreciation Foregone Interest Decision: Choice of Payment Information
Choice: Lease • drive-off costs(payments due at lease signing): $2,136.77 • total of 24 monthly payments: $7248 = 24 months * $302 per month • monthly Payment: $249 + tax • tax + documents = $1237 + $35 = $1272, or $53 per month • total: $9384.77
Buy The Car, Cash This Year Next Year Year After foregone interest on $17,760: $1,225* $2,450 depreciation: $2,813# $4,222 * @ 6.9 % interest $4,038 $6,672 # price+tax-blue book = $17,760 - 0.806*$18,545 Lease, 24 months total drive-off: $2,137 $2,137 total monthly payments @$302/m.: $3,624 $7,248 $147 $294 foregone interest on $2,137**: $5908 $9679 ** Assumes no opportunity cost of monthly payments
Example: Buying a New ‘96 Taurus: Advertised Price $16488 • Knowns • advertised price + tax + documents: $17,760 • down payment: $2,137 • loan amount: $15,623 • loan amount = $17,760 - $2,137 • annual interest rate: 6.9% • loan term in months: 24 months • Unknowns • monthly payment ( $698.77)
Choice: Two year Loan @ 6.9% • Loan Cost = Principal + Interest = $16,771 • principal = loan =$15,623 • interest = $1,148 • Resale Value After 2 Years • 0.73*$18,545 = $13,538 • foregone interest on $2137: $294 • total cost = $5,664 • $16,771 - $13,538 + $294
Cost of Using a ‘96 Taurus for 2 Yrs. * residual value: $11,480 ** blue book: $13,538
Summary - Vocabulary - Concepts • opportunity cost • depreciation • interest on principal • lease • loan • services of a car
SCARCITY AND PRODUCTION POSSIBILITY CURVES • Production Possibility Curve A visual representation of tradeoffs that arise in an economy that produces two goods. A picture of the choices which can be made when considering the production of two goods.
PRODUCTION POSSIBILITY CURVE(FRONTIER) A production possibility curve shows how all of an economies available resources can be used to produce various combinations of goods and services.
WHAT ARE RESOURCES? • Labor -- human effort used to produce • Production facilities (PHYSICAL CAPITAL) -- factories, offices, stores, restaurants • Human Capital -- knowledge and skills acquired by workers • Natural Resources (LAND) -- things created by acts of nature and used to produce
Y GRAPHING POSSIBILITIES X
Y GRAPHING POSSIBILITIES Thousands of computers per year X Number of Space Missions Per Year
Y GRAPHING POSSIBILITIES PRODUCTION POSSIBILITY CURVE Thousands of computers per year X Number of Space Missions Per Year
Y GRAPHING POSSIBILITIES PRODUCTION POSSIBILITY CURVE Thousands of computers per year e 380 X 4 Number of Space Missions Per Year
Y GRAPHING POSSIBILITIES PRODUCTION POSSIBILITY CURVE Thousands of computers per year e 380 f 300 X 4 5 Number of Space Missions Per Year