1. Llad Phillips1 Introduction to Economics Outline: Lecture One Information About the Course Information About the Course Elements of Personal Finance Elements of Personal Finance  Buying or Leasing a Car

2. Economics 109Llad PhillipsFall 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)

3. Labs(sections) in the Micro Computer Lab(MCL) 11189 F 9:00-9:50P333 Lab, Phelps 1526, JD 11197M 7:00-7:50 PM P333 Lab, Phelps 1526, JA 11205W 8:00-8:50P333 Lab, Phelps 1526, JD 11213 M 5:00-5:50 PM P200 Lab, Phelps 1525, JA 62646T 4:00-4:50 PM P333 Lab, Phelps 1526, LP TH 4:00-4:50 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

4. 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

5. 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

6. 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

7. Llad Phillips7 Introduction to Economics Elements of Personal Finance

8. Llad Phillips8 Elements of Personal Finance Economics in every day life 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

9. Llad Phillips9 Buying or Leasing a Car Your choice of vehicle 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

10. Llad Phillips10 Economic Concept: Consumer Durable, e.g. car, refrigerator perishable good: strawberries 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 durable good: car  resale value declines each year  How does this affect choice of which car to buy?

11. Llad Phillips11 Sources of Information Kelley Blue Book: Used Car Guide Kelley Blue Book: Used Car Guide  bookstores Kelley Blue Book: Internet Kelley Blue Book: Internet  Universal Resource Locator(URL)  http://www.kbb.com/ Manufactuters Manufactuters  Nissan  http://www.nissan-usa.com/

12. Kelley Blue Book

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

16. Llad Phillips16 Economic Decision Making choice of a vehicle choice of a vehicle  Nissan Altima XE 4-Dr Sedan  Ford Taurus 4-Dr Sedan choice of payment method choice of payment method  cash  lease  payment plan

17. Llad Phillips17 Economists Assume You Know What You Like Lingo: economists call these consumer tastes or consumer preferences Lingo: economists call these consumer tastes or consumer preferences

18. Llad Phillips18 Economists Assume You Can make Comparisons example 1996 Altima vs. 1996 Ford Taurus 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.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

19. Llad Phillips19 Economists Assume You Can Make Tradeoffs Do you prefer a Ford Taurus or an Altima plus $2,326 = $18,545 - $16,219 ? 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

20. Llad Phillips20 Data Kelley’s Prices Nissan’s Specs Framework “Your Tastes” Information Decision: Choice of Vehicle Economics Framework: Converting Data Into Useful Information for Decisions

21. Llad Phillips21 Data ? ? Framework Information Decision: Choice of Payment Economics Framework: Converting Data Into Useful Information for Decisions

22. Llad Phillips22 Choice of Payment Method cash cash lease lease loan loan

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

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

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

26. Llad Phillips26 Depreciation: Taurus, GL Sedan

27. Llad Phillips27

28. Llad Phillips28

29. Llad Phillips29 Choice: cash purchase price: $16,488 purchase price: $16,488 tax at 7.5 %: $1,237 tax at 7.5 %: $1,237 documents: $35 documents: $35 total: $17,760 total: $17,760

30. Llad Phillips30 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.)

31. Llad Phillips31 Note: The first years cost: 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.

32. Llad Phillips32 Economic Principles A dollar today is not the same as a dollar tomorrow! 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 “opportunity cost” of spending your money is the foregone interest. The cost of buying the services of the car, neglecting operating costs: The cost of buying the services of the car, neglecting operating costs:  depreciation: owning a new car  foregone interest

33. Llad Phillips33 Data ? ? Framework: Depreciation Foregone Interest Information Decision: Choice of Payment Economics Framework: Converting Data Into Useful Information for Decisions

34. Llad Phillips34 Choice: Lease drive-off costs(payments due at lease signing): $2,136.77 drive-off costs(payments due at lease signing): $2,136.77 total of 24 monthly payments: $7248 = 24 months * $302 per month 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 total: $9384.77

35. Llad Phillips35 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

36. Llad Phillips36 Example: Buying a New ‘96 Taurus: Advertised Price $16488 Knowns 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 Unknowns  monthly payment ( $698.77)

37. Llad Phillips37 Choice: Two year Loan @ 6.9% Loan Cost = Principal + Interest = $16,771 Loan Cost = Principal + Interest = $16,771  principal = loan =$15,623  interest = $1,148 Resale Value After 2 Years Resale Value After 2 Years  0.73*$18,545 = $13,538 foregone interest on $2137: $294 foregone interest on $2137: $294 total cost = $5,664 total cost = $5,664  $16,771 - $13,538 + $294

38. Llad Phillips38 Cost of Using a ‘96 Taurus for 2 Yrs. * residual value: $11,480 ** blue book: $13,538

39. Llad Phillips39 Summary - Vocabulary - Concepts opportunity cost opportunity cost depreciation depreciation interest on principal interest on principal lease lease loan loan services of a car services of a car

40. Llad Phillips40 http://www/ latimes.com

41. Llad Phillips41 SCARCITY AND PRODUCTION POSSIBILITY CURVES Production Possibility Curve 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.

42. Llad Phillips42 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.

43. Llad Phillips43 WHAT ARE RESOURCES? Labor Labor -- human effort used to produce -- human effort used to produce Production facilities (PHYSICAL CAPITAL) Production facilities (PHYSICAL CAPITAL) -- factories, offices, stores, restaurants Human Capital Human Capital -- knowledge and skills acquired by workers -- knowledge and skills acquired by workers Natural Resources (LAND) Natural Resources (LAND) -- things created by acts of nature and used to produce -- things created by acts of nature and used to produce

44. Llad Phillips44 GRAPHING POSSIBILITIES

45. Llad Phillips45 Y X GRAPHING POSSIBILITIES

46. Llad Phillips46 Y X Thousandsofcomputers per year Number of Space Missions Per Year GRAPHING POSSIBILITIES

47. Llad Phillips47 Y X Thousandsofcomputers per year Number of Space Missions Per Year PRODUCTION POSSIBILITY CURVE GRAPHING POSSIBILITIES

48. Llad Phillips48 Y X Thousandsofcomputers per year Number of Space Missions Per Year 380 4 e PRODUCTION POSSIBILITY CURVE GRAPHING POSSIBILITIES

49. Llad Phillips49 Y X Thousandsofcomputers per year Number of Space Missions Per Year 380 4 e 300 5 f PRODUCTION POSSIBILITY CURVE GRAPHING POSSIBILITIES