Introduction to Economics Outline Lecture One Information About

Introduction to Economics Outline: Lecture One Information About the Course Elements of Personal Finance Buying or Leasing a Car Llad Phillips 1

Economics 109 Llad Phillips Introduction to Economics Fall 1998 Hour, Location: 2: 00 -3: 15, Phelps 1260 Instructor: Llad Phillips Office Hours: NH 3032, 9: 30 -10: 15 Tu. Th and 3: 30 -3: 50 Tu. Th, 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 P 333 Lab, Phelps 1526, JD 11197 M 7: 00 -7: 50 PM P 333 Lab, Phelps 1526, JA 11205 W 8: 00 -8: 50 P 333 Lab, Phelps 1526, JD 11213 M 5: 00 -5: 50 PM P 200 Lab, Phelps 1525, JA 62646 T 4: 00 -4: 50 PM P 333 Lab, Phelps 1526, LP TH 4: 00 -4: 50 PM P 333 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/econ 109

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 Llad Phillips 7

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 Llad Phillips 8

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 Llad Phillips 9

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 Llad Phillips does this affect choice of which car to buy? 10

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/ Llad Phillips 11

Kelley Blue Book

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 Llad Phillips 16

Economists Assume You Know What You Like Lingo: economists call these consumer tastes or consumer preferences Llad Phillips 17

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 Llad Phillips 18

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 Llad Phillips 19

Economics Framework: Converting Data Into Useful Information for Decisions Kelley’s Prices Data Nissan’s Specs Framework “Your Tastes” Decision: Choice of Vehicle Llad Phillips Information 20

Economics Framework: Converting Data Into Useful Information for Decisions ? Data ? Framework Decision: Choice of Payment Llad Phillips Information 21

Choice of Payment Method cash lease loan Llad Phillips 22

http: //www. fordcredit. com/nafo/rcl/agreement. html

Walnut Creek Dealer: 1996, Ford Taurus, $16, 488 Example 5, 976 + tax 249 + tax

Example 249 + tax 24 months 5, 976 + tax

Depreciation: Taurus, GL Sedan Llad Phillips 26

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Choice: cash purchase price: $16, 488 tax at 7. 5 %: $1, 237 documents: $35 total: $17, 760 Llad Phillips 29

This Year Next Year Keep Your Money * @ 6. 9 % interest Buy The Car, Cash $17, 760 $1, 225* Year After $17, 760 $1, 225 $17, 760 $18, 985 $20, 210 Car’s Services For 1 Yr. Resale value: Car’s Services For 2 Yrs. $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. ) Llad Phillips 30

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. Llad Phillips 31

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 Llad Phillips 32

Economics Framework: Converting Data Into Useful Information for Decisions ? Data ? Framework: Depreciation Foregone Interest Decision: Choice of Payment Llad Phillips Information 33

Choice: Lease drive-off costs(payments due at lease signing): $2, 136. 77 total of 24 monthly payments: $7248 = 24 months * $302 per monthly Payment: $249 + tax + documents = $1237 + $35 = $1272, or $53 per month total: $9384. 77 Llad Phillips 34

Buy The This Year Next Year Car, Cash Year After foregone interest on $17, 760: $1, 225* depreciation: $2, 813# $2, 450 $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 total monthly payments @$302/m. : $3, 624 $147 foregone interest on $2, 137**: $7, 248 $294 $5908 $9679 ** Assumes no opportunity cost of monthly payments Llad Phillips 35

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) Llad Phillips 36

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 Llad Phillips 37

Cost of Using a ‘ 96 Taurus for 2 Yrs. * residual value: $11, 480 ** blue book: $13, 538 Llad Phillips 38

Summary - Vocabulary - Concepts opportunity cost depreciation interest on principal lease loan services of a car Llad Phillips 39

http: //www/latimes. com Llad Phillips 40

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. Llad Phillips 41

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. Llad Phillips 42

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 Llad Phillips 43

GRAPHING POSSIBILITIES Llad Phillips 44

Y GRAPHING POSSIBILITIES X Llad Phillips 45

Y GRAPHING POSSIBILITIES Thousands of computers per year X Number of Space Missions Per Year Llad Phillips 46

Y Thousands of computers per year GRAPHING POSSIBILITIES PRODUCTION POSSIBILITY CURVE X Number of Space Missions Per Year Llad Phillips 47

Y Thousands of computers per year 380 GRAPHING POSSIBILITIES PRODUCTION POSSIBILITY CURVE e 4 Number of Space Missions Per Year Llad Phillips X 48

Y GRAPHING POSSIBILITIES Thousands of computers per year 380 300 PRODUCTION POSSIBILITY CURVE e f 4 5 Number of Space Missions Per Year Llad Phillips X 49