Summary Review

1
Summary Review

• Part I 6 lectures Guide to Personal Finance
• Part II Chs 1-4, 20 OSullivan Sheffrin

2
Review Concepts

• Opportunity Cost
• Lecture 1
• Chapter 1
• Chapter 2
• Chapter 3
• Scarcity
• Lectures 3 4
• Chapter 1
• Chapter2

3
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
_at_ 6.9 interest
Buy The Car, Cash
Cars Services For 1 Yr.
Cars 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 Cars Services 4,038(1 Yr.) 6,672(2
Yrs.)
4
Economic Principles

• A dollar today is not the same as a dollar
  tomorrow!
• 10 today _at_ 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

5
Y
GRAPHING POSSIBILITIES
PRODUCTION POSSIBILITY CURVE
Thousands of computers per year
X
Number of Space Missions Per Year
6
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)
24 hours
0 hours
7
Y
GRAPHING POSSIBILITIES
PRODUCTION POSSIBILITY CURVE
Thousands of computers per year
X
Number of Space Missions Per Year
8
Review Concepts

• Demand
• Lecture 3
• Chapter 4
• Equilibrium
• Lecture 6 National Income GDP
• Chapter 4
• Thinking Like an Economist
• Lecture 2 economic paradigm
• Chapter 1

9
Price, Mortgage Rate
Demand for Mortgage Credit
10
7
Quantity of Mortgage Credit
10
Demand for Mortgage Credit
Price, Mortgage Rate
Higher Personal Income
10
Quantity of Mortgage Credit
11
Chapter Twenty

• Conceptual Framework Circular Flow

Firms
Firms
Supply Goods
Demand Goods
Income
Labor
Households
Households
Income Perspective
Expenditure Perspective
12
Squares with Equal Sides and 45 degree Lines
Y Y
Income, Y
Y1
450
Y1
Income, Y
13
Chapter 20
Income Expenditure Line
GDPY
Aggregate Expenditure, GDP
GDP C I
Total Expenditure Line
450
Income,Y
GDPY
National Income, Y
14
The Economic Paradigm

• describing the alternatives to choose among
• pricing the alternatives
• choosing the best alternative

15
The Economic Paradigm example buying a car

• describing the alternatives to choose among
• cash the opportunity cost of losing interest
• lease depreciation included in payments
• loan sell the car to account for depreciation
• pricing the alternatives valuation
• Oscar Wilde- economists know the price of
  everything and the value of nothing
• choosing the best alternative
• best lowest cost
• possibly subject to a constraint having the

16
Review Concepts

• Circular Flow
• Lecture 6 income perspective expenditure
  perspective
• Income consumption savings
• GDP Consumption investment
• Chapter 20
• Present Value
• Lectures 1 5

17
Chapter Twenty

• Conceptual Framework Circular Flow

Firms
Firms
Supply Goods
Demand Goods
Income
Labor
Households
Households
Income Perspective
Expenditure Perspective
18
Economic Principles

• A dollar today is not the same as a dollar
  tomorrow!
• 10 today _at_ 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

19
Economic Concept

• present value of a stream of expected future net
  earnings, or profits, per share
• PV(t) ENE(t) ENE(t1)/(1i)
• may know this years net earnings, NE(t)
• your expectations of the future affect your best
  guess for next year, ENE(t1)
• at an interest rate of 7, 1.07 next year is
  equivalent to a 1 this year
• to compare dollar values for different years,
  they have to be discounted to a common year
• PV(t) ENE(t) ENE(t1)/(1i) ENE(t2)/(1i)2
  ...

20
Part I

• Buying a Car Credit
• Buying a House
• Financial Planning
• Investment

21
Cost of Using a Car for Several Years

• Depreciation in cars market value
• Interest
• opportunity cost of your money

22
Mortgage Loans/Fixed Rate

• Pay back the loan with declining balance of
  principal owed
• build equity(ownership) slowly
• Pay interest(price of credit)
• frontloaded

23
Financial Planning Meeting Future Needs in Life

• Family Formation(significant other)
• term insurance(protection against unforeseen
  death loss of earnings)
• Housing
• space
• asset building equity(ownership)
• Retirement

24
Financial Planning Meeting Future Needs in
Life(continued)

• Retirement
• Old Way Social Security/Pension Plan
• insufficient income
• IRAs/Employer Plans401(k)403(b)
• supplementary income

25
Investment

• Budget Your Expenditures
• Tool income-expense statement
• Earn money(income)
• Market value of your time human capital
• Your value of your time your taste for leisure
• Pay yourself first(save)
• Invest Strategies?(Seems Complex)
• Focus Your Portfolio Choices
• cash currency checking account (SURVIVAL)
• money market funds(Treasury Bills 13 wk-1 yr)
• bonds(Treasury Notes and Bonds 2yr -30 yr)
• stock(equity) index fund

26
Earnings
Market Determines the Value of Your Time in
Work, Given Your Human Capital, So Your Wage Is
the Market Tradeoff of Your Time for Money
480
0
Leisure (learning)
24 hours
0 hours
27
Investment(continued)

• Invest Strategies (Simplify!)
• cash little interest, but liquid(no waiting for
  )
• money market more interest, relatively liquid
• Treasury Notes (2 year or 5 year Note)
• more risk unless buy and hold
• buy and hold(certain) get principal back plus
  interest
• Stock(equity) Index Fund
• market basket of stocks diversified
• buy and hold/ betting on growth of 11 per year
  on average
• Track Your Wealth Asset-Liabilities Stmt.

28
Efficient Investment Portfolio
Reward Average Rate of Return
Market Determines the Best Tradeoff Between
Reward and Risk
Risk Volatility
29
Summary - Vocabulary - ConceptsLecture One

• opportunity cost
• depreciation
• interest on principal
• lease
• loan
• services of a car

30
Vocabulary - Concepts-Lecture Two

• human capital
• assets
• liabilities
• net worth, wealth
• income
• expenditures
• savings

• economic paradigm
• down payment
• loan term
• monthly payment
• annual percentage rate or APR
• equity
• personal financial planning
• life event analysis

31
Vocabulary-Concepts Lecture Three

• median
• demand curve
• mortgage rate
• personal income
• mortgage credit
• rule of correspondence

• stock
• inflow
• outflow
• time endowment
• allocation of your time
• learning(leisure)
• earning in future
• earning now
• iso-preference curves
• reservation wage

32
Vocabulary-Concepts Lecture Four

• Markowitz Portfolio Analysis
• stock index fund
• bond fund
• money market fund
• guaranteed insurance contract
• monthly rate of return

• capital gains
• dividends
• mean rate of return on an asset
• risk of holding an asset
• a risk averse person
• investment portfolio

33
Vocabulary-Concepts Lecture Five

• capital asset pricing model
• market risk
• asset specific risk
• stocks beta, ?
• moving average
• exponential growth
• Dow Jones Industrials
• present value

• net earnings per share
• expectations
• discount factor
• corporate profits after taxes
• business cycle
• peak
• trough
• index of leading indicators

34
Part II Chapter One

• Scarcity
• Production Possibilities Curve
• Economic way of thinking/Paradigm
• describe the alternatives to choose among
• value these alternatives
• choose the best alternative

35
Y
PRODUCTION POSSIBILITY CURVE
Income Earned
e
Scarce Resource 24 Hours Per Day
X
Chapters Studied
36
Part II Chapter Two

• opportunity cost
• marginal principal
• diminishing returns
• spillovers(externalities)
• reality(real versus nominal value)
• purchasing power
• example a today is not the same as a
  tomorrow vice versa

37
Part II Chapter Three

• Circular Flow

Firms
Firms
Income
Labor
Supply Goods
Demand Goods
Households
Households
Labor Market
Goods Market
38
Chapter Three (continued)

• absolute advantage
• comparative advantage

Student Bobby
Student Abby
3 hours per chapter 1.5 hours per lab
1 hour per chapter 1 hour per lab
Both Abby and Bobby are short of time
1 chapter per lab
1/2 chapter per lab
Form a study group and trade knowledge
Abby reads
Bobby hacks
Each Specializes
39
Chapter Four
demand/income, other prices
price
price
quantity/year
quantity/year
demand
demand
price
price
supply
quantity/year
quantity/year
40
Chapter 20
Income Expenditure Line
GDPY
Aggregate Expenditure, GDP
GDP C I
Total Expenditure Line
450
Income,Y
GDPY
National Income, Y
41
Part II Chapter Three

• Circular Flow

Firms
Firms
Income
Labor
Supply Goods
Demand Goods
Households
Households
Labor Market
Goods Market
Income Perspective
Expenditure Perspective
42
Expenditure Perspective 2- Legged Stool
Firms
Consumption
Supply Goods
Demand For Goods
Households
Households Consumption of Goods and
Services Firms Investment in Plant and Equipment