Introduction to Economics

1
Introduction to Economics

• Elements of Personal Finance

2
Outline Lecture Two

• car loans
• the economic approach to problem solving
• personal financial planning

3
Economics 109 Llad Phillips Fall
1998 Introduction to Economics Hour, Location
200-315, Phelps 1260 Instructor Llad
Phillips Office Hours NH 3032, 930-1015 TuTh
and 330-350 TuTh, and by appointment, Texts Ke
nneth Morris and Alan Siegel,The Wall Street
Journal Guide to Understanding Personal Finance,
Revised(1997) Arthur OSullivan and Steven
Sheffrin, Economics, Principles and
Tools(1998)
4
Labs(sections) in the Micro Computer
Lab(MCL) 11189 F 900-950 P333 Lab, Phelps 1526,
JD 11197 M 700-750 PM P333 Lab, Phelps 1526,
JA 11205 W 800-850 P333 Lab, Phelps 1526,
JD 11213 M 500-550 PM P200 Lab, Phelps 1525,
JA 62646 T 400-450 PM P333 Lab, Phelps 1526,
LP 66381 TH 400-450 PM P333 Lab, Phelps 1526,
LP Teaching Assistants Joshua Anderson,
Office Hours NH 2036 Th 330-430, F 3-4John
Davis, Office Hours NH 2032 Exams Quiz
Thursday, Oct. 15,. You will need a
scantron sheet and a 2 pencil Midterm
Tuesday, Nov. 3, 200-315 PM. Scantron 2
Final Tuesday, Dec. 8, 400-700 PM,
Scantron 2

5
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.ed
u/econ109
6
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
7
Reading Assignment Guide to Understanding
Personal Finance, Ch. 2, "Credit" OSullivan
and Sheffrin Ch.1, Introduction What is
Economics? emphasis concepts of scarcity and
production possibilities curve OSullivan
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

8
Outline Lecture Two

• car loans
• the economic approach to problem solving
• personal financial planning

9
Elements of Personal Finance

• Economics in every day life
• loans
• car loans

10
Example Buying a New 96 Taurus

• 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

11
Using Excel 5.0 for a Solution
12
Excel select cell for monthly payment, click on
Function Wizard
select Financial and PMT
13
Excel click on the help button in the previous
window for examples
14
Using Excel 5.0 for a Solution
15
http//www.fordcredit.com/calculator/calcbuffer.ht
ml
16
(No Transcript)
17
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

18
Example
249 tax
24 months
5,976 tax
19
Increasing the Length of the Loan

• monthly payment amount decreases
• amount of total payments increases
• amount of total interest payments increases
• total interest as of total payments increases

20
Using Excel 5.0 for a Solution
21
Interest as a Fraction of Cost
22
(No Transcript)
23
(No Transcript)
24
Summary Loans

• interest is front-loaded in payment plan
• interest cost increases with the loan term
• total cost increases with the loan term
• equity is low at the beginning of the loan

25
The Economic Approach to Problem Solving

• The Economic Paradigm

26
The Economic Paradigm

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

27
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

28
Personal Financial Planning

• Financing Life Events

29
Life Event Approach

• marriage
• children
• financial security insurance
• housing
• education
• retirement
• long term care
• estate

reference Ernst Youngs Personal Financial
Planning Guide, 2nd Ed. John Wiley
30
Life Cycle Approach Learning Earning
Activity/Phase
High School Education
Nurturing
College
Retirement
Work
Age
Infancy
Adolescence
Young Adult
Adult
Senescence
31
Life Cycle Approach The Planners
100
You
50
Parents
0
Age
Infancy
Adolescence
Young Adult
Adult
Senescence
32
Life Cycle Approach Planning
Education Investment in Human Capital or
Earning Power
Accumulating Assets cars appliances
furnishings --------------------- house
financial assets
Spending
Age
Nurturing
High School Education
College
Work
Retirement
33
Planning Tools

• Assets-Liabilities Statement
• Assets Minus Liabilities Net Worth
• measure of wealth
• Income-Expenditure Statement
• Income Minus Expenditures Saving
• measure of change in wealth

34
Assets-Liabilities Statement
35
Income-Expense Statement
36
http//www.fordcredi.com/fplanner.cgi
37
Income-Expense Statement US Population 1988
other health, 5 pensions Soc. Sec., 7
other, 15 Source Guide to Understanding
Personal Finance, p. 87
38
Strategies for Meeting Future Expenses

• Buy a House
• Tax-Sheltered Savings Plans
• Stocks and Bonds

39
Buying a House

• Negatives?
• down payment requires saving for this goal
• interest payments are front-loaded, equity growth
  delayed
• opportunity cost of not investing in stocks

• Positives
• provides space
• builds equity
• interest is deductible

40
Summary - Vocabulary - Concepts

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

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

41
2. Thursday, Oct. 1, Lecture Two " Car loans
the economic paradigm personal financial
planning" Car loans The economic approach to
problem solving Personal financial
planning Reading Assignment Guide to
Understanding Personal Finance, Ch. 4,
"Financial Planning" OSullivan and Sheffrin
Ch.2, Key Principles of Economics emphasis
concepts of choice and opportunity
cost Problems O S Text p. 35 1, 2, 3, 4,
5, 6, 7, 8, 9, 10, 11, 12, 13
42
The Principle of Opportunity Cost

• No matter what we do, there are always tradeoffs.
• Scarcity -- limited resources -- is the reason.
• The opportunity cost of something is what you
  sacrifice to get it.

43
Opportunity Costs and Production Possibilities

• The production possibility curve illustrates the
  principle of opportunity cost for an entire
  economy.
• -- shows all possible combinations of goods
  and services available to entire economy.
• --- principle of opportunity cost explains
  why production possibility curve is negatively
  sloped.

44
THE MARGINAL PRINCIPLE

• Marginal Benefit
• The extra benefit resulting from a small
  increase in the activity.
• Marginal Cost
• The additional cost resulting from a small
  increase in the activity.