1. Llad Phillips1 Introduction to Economics Outline: Lecture One n Information About the Course n What is economics all about? n Examples: Elements of Personal Finance u Buying or Leasing a Car

2. Economics 109Llad PhillipsFall 2002 Introduction to Economics Hour, Location: 2:00-3:15, Engineering 1104 Instructor: Llad Phillips, Llad@econ.ucsb.edu Office Hours: NH 3032, 9:30-10:15 TuTh and 10:30-11:15 W, and by appointment Arthur O’Sullivan and Steven Sheffrin, Economics, Principles and Tools, Third Edition(2003,2001)

4. Problem Assignments: At least half of the questions on the 25 minute quiz will be from the assigned problems, both text and lab. 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/ Note: menu on the left, Class Pages: Economics 109 Text Home Page: http://www.prenhall.com/osullivan/

5. Lecture Topics and Reading List Part One Personal Finance: Economics in Everday Life 1. Tuesday Sept. 25, Lecture One: "Choosing a method to finance a car" Buying or Leasing a car The choice between: paying cash leasing buying on time

6. Reading Assignment: 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.13: 1, 2, 3, 4, 5. p. 21: 1, 2, 3, 4, 5, 6

7. Llad Phillips7 Lectures: Organization of Concepts

8. Llad Phillips8 Collective, Group or Social Behavior n Political n Social n Cultural n Economic u How to understand and cope with the economic part of life

9. Llad Phillips9 World Economy Japan Mexico European Union US Economy YOUMe Japan Iraq

10. Llad Phillips10 World Economy US Economy YOU Me

11. Llad Phillips11 Topics in Personal Finance, What Can We Learn from Econ? n Buying a Car n Buying a House n Budgeting Expenses n Saving and Investing Money

12. Llad Phillips12 Concepts and Buying a Car n Scarcity n Consumer Durable and Depreciation n opportunity cost n Consumer Choice u brand and model u how to pay

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15. Llad Phillips15 What is Economics All About?

16. Llad Phillips16 Five Topic Areas n Personal Finance and the Individual u income u expenditure F income-expenditure statement u wealth or net assets F asset-liabilities statement n The National Economy n Markets: Competition versus Monopoly n The Global Economy n Economic Welfare

17. Llad Phillips17 Five Topic Areas n II. The National Economy u consumers u business firms u government n III. Competition versus Monopoly, the Firm u how monopoly shafts the consumer u how competition benefits the consumer u anti-trust policy

18. Llad Phillips18 Five Topic Areas n IV. The Global Economy u Trade u Balance of Payments u Foreign Exchange n Economic Welfare u distribution of income u poverty u aging and health u public goods, e.g. safety

19. Llad Phillips19 Year Before Last Year’s (2000) Current Economic Questions n Who is better for you, Bush or Gore? n Is the great bull market of the 90’s over? n Is the economy about to crash? n Is Japan going to recover? n Will the government break up Microsoft?

20. Llad Phillips20 Last Year’s (2001) Current Economic Questions n Are we in a recession? n How bad could it get? n How long will it last? n Will the stock market stabilize? n What kind of economic impact did the attack have? n If we continue to mobilize, what kind of economic impact will that have?

21. Llad Phillips21 http://www.odci.gov/World Factbook 2001 Afghanistan,GDP per capita: $800 versus US $36,200

22. Llad Phillips22 http://www.odci.gov/ World Factbook 2001 Iraq,GDP per capita: $2500 versus US $36,200

23. Llad Phillips23 Introduction to Economics Elements of Personal Finance

24. Llad Phillips24 Elements of Personal Finance n Economics in every day life u buying or leasing a car u buying or renting a home u personal financial planning u managing personal investments u managing a household budget u determinants of personal income

25. Llad Phillips25 Buying or Leasing a Car n Your choice of vehicle u Is it what you need? u Is it what you want? u Is it what you can afford? u Loss of value through depreciation of your car F physical wear and tear F decrease in resale value: paying a premium for newness

26. Llad Phillips26 The Process of Economic Decision Making n Compare alternative choices u if you make a choice are you giving anything up (a cost) to get what you want? n Which is the best choice? u Criteria: lowest cost or highest benefit net of cost

27. Llad Phillips27 Economic Concept: Consumer Durable, e.g. car, refrigerator n perishable good: strawberries u experience with Farmers’ Markets u Haymarket Square in Boston F Why did institutional buyers, such as convents, buy on late Saturday afternoons? n durable good: car u resale value declines each year F How does this affect choice of which car to buy?

28. Llad Phillips28 Sources of Information n Kelley Blue Book: Used Car Guide u bookstores n Kelley Blue Book: Internet u Universal Resource Locator(URL) F http://www.kbb.com/ n Manufacturers u Nissan F http://www.nissandriven.com/

29. Llad Phillips29 2003 Nissan Altima

30. Kelley Blue Book

33. http://www.nissan-usa.com/

34. Llad Phillips34 Economic Decision Making n choice of a vehicle u Nissan Altima XE 4-Dr Sedan u Ford Taurus 4-Dr Sedan n choice of payment method u cash u lease u payment plan

35. Llad Phillips35 Economists Assume You Know What You Like n Lingo: economists call these consumer tastes or consumer preferences

36. Llad Phillips36 Economists Assume You Can make Comparisons n example 1996 Altima vs. 1996 Ford Taurus u compare specifications or attributes F we know price for a bundle of attributes e.g. horsepower, miles per gallon, etc.e.g. horsepower, miles per gallon, etc. u dealer invoice (with destination charge) F Altima: $14,641 F Taurus: $17,171 u manufacturer’s suggested retail price (MSRP) F Altima: $16,219 F Taurus: $18,545

37. Llad Phillips37 Economists Assume You Can Make Tradeoffs n Do you prefer a Ford Taurus or an Altima plus $2,326 = $18,545 - $16,219 ? u If you prefer the Ford, then you buy the Taurus u If you prefer the Nissan plus the cash, then you buy the Altima u If you are indifferent between these two options or bundles of goods ( car plus cash), then you might buy either one

38. Llad Phillips38 Data Kelley’s Prices Nissan’s Specs Framework “Your Tastes” Information Decision: Choice of Vehicle Economics Framework: Converting Data Into Useful Information for Decisions

39. Llad Phillips39 Data ? ? Framework ? Information Decision: Choice of Payment Economics Framework: Converting Data Into Useful Information for Decisions

40. Llad Phillips40 Choice of Payment Method n cash n lease n loan

41. Llad Phillips41 Cash n for cash, the bottom line is equal to: total cost - resale value F the total cost is going to depend on manufacturer’s suggested retail price, MSRP F the resale value will depend on the value lost from depreciation

42. Llad Phillips42 Depreciation: Taurus, GL Sedan

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45. Llad Phillips45 Choice: cash n purchase price: $16,488 n tax at 7.5 %: $1,237 n documents: $35 n total: $17,760

46. Llad Phillips46 Keep Your Money This Year  Next Year Year After $17,760 $1,225*$1,225 * @ 6.9 % interest $17,760$18,985$20,210 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.)

47. Llad Phillips47 Note: n The first years cost: u $18,985 - $14,947 = $4,038 u (principal + interest) -depreciation = principal - (depreciation - interest) F Bottom Line = Total Cost - Resale Value

48. Llad Phillips48 Economic Principles n A dollar today is not the same as a dollar tomorrow! u $10 today @ 6.9% = $10 * 1.069 next year n The “opportunity cost” of spending your money is the foregone interest. n The cost of buying the services of the car, neglecting operating costs: u depreciation: owning a new car u foregone interest

49. Llad Phillips49 Data ? ? Framework: Depreciation Foregone Interest Information Decision: Choice of Payment Economics Framework: Converting Data Into Useful Information for Decisions

50. Llad Phillips50 Choice: Lease n drive-off costs(payments due at lease signing): $2,136.77 n total of 24 monthly payments: $7248 = 24 months * $302 per month u monthly Payment: $249 + tax u tax + documents = $1237 + $35 = $1272, or $53 per month n total: $9384.77

51. http://www.fordcredit.com/

52. Example Walnut Creek Dealer: 1996, Ford Taurus, $16,488   5,976 + tax 249 + tax

53. Example 249 + tax 24 months 5,976 + tax

54. Llad Phillips54 This Year  Next Year Year After $2,450$1,225* $4,222 $6,672 * @ 6.9 % interest $4,038 Buy The Car, Cash foregone interest on $17,760: depreciation: # price+tax-blue book = $17,760 - 0.806*$18,545 $2,813# Lease, 24 months total drive-off:$2,137 total monthly payments @$302/m.:$3,624$7,248 foregone interest on $2,137**: $147$294 $5908$9679 ** Assumes no opportunity cost of monthly payments

55. Llad Phillips55 Example: Buying a New ‘96 Taurus: Advertised Price $16488 n Knowns u advertised price + tax + documents: $17,760 u down payment: $2,137 u loan amount: $15,623 F loan amount = $17,760 - $2,137 u annual interest rate: 6.9% u loan term in months: 24 months n Unknowns u monthly payment ( $698.77)

56. Llad Phillips56 Choice: Two year Loan @ 6.9% n Loan Cost = Principal + Interest = $16,771 u principal = loan =$15,623 u interest = $1,148 n Resale Value After 2 Years u 0.73*$18,545 = $13,538 n foregone interest on $2137: $294 n total cost = $5,664 u $16,771 - $13,538 + $294

57. Llad Phillips57 Cost of Using a ‘96 Taurus for 2 Yrs. * residual value: $11,480 ** blue book: $13,538

58. Llad Phillips58 Summary - Vocabulary - Concepts n opportunity cost n depreciation n interest on principal n lease n loan n services of a car

59. Llad Phillips59 http://www/ latimes.com

60. Llad Phillips60 SCARCITY AND PRODUCTION POSSIBILITY CURVES n Production Possibility Curve A visual representation of tradeoffs that arise in an economy that produces two goods. 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. A picture of the choices which can be made when considering the production of two goods.

61. Llad Phillips61 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. A production possibility curve shows how all of an economies available resources can be used to produce various combinations of goods and services.

62. Llad Phillips62 WHAT ARE RESOURCES? n Labor -- human effort used to produce -- human effort used to produce n Production facilities (PHYSICAL CAPITAL) -- factories, offices, stores, restaurants Human Capital Human Capital -- knowledge and skills acquired by workers -- knowledge and skills acquired by workers n Natural Resources (LAND) -- things created by acts of nature and used to produce -- things created by acts of nature and used to produce

63. Llad Phillips63 GRAPHING POSSIBILITIES

64. Llad Phillips64 Y X GRAPHING POSSIBILITIES

65. Llad Phillips65 Y X Thousandsofcomputers per year Number of Space Missions Per Year GRAPHING POSSIBILITIES

66. Llad Phillips66 Y X Thousandsofcomputers per year Number of Space Missions Per Year PRODUCTION POSSIBILITY CURVE GRAPHING POSSIBILITIES

67. Llad Phillips67 Y X Thousandsofcomputers per year Number of Space Missions Per Year 380 4 e PRODUCTION POSSIBILITY CURVE GRAPHING POSSIBILITIES

68. Llad Phillips68 Y X Thousandsofcomputers per year Number of Space Missions Per Year 380 4 e 300 5 f PRODUCTION POSSIBILITY CURVE GRAPHING POSSIBILITIES