Transcript Document 7671222
Summary Review
Part I: 6 lectures &
Guide to Personal Finance
Part II: Ch’s 1-4, 20 O’Sullivan & Sheffrin
Llad Phillips 1
Review: Concepts
Opportunity Cost Lecture 1 Chapter 1 Chapter 2 Chapter 3 Scarcity Lectures 3 & 4 Chapter 1 Chapter2 Llad Phillips 2
This Year Next Year Year After Keep Your Money $17,760 $17,760 $1,225* $17,760 $1,225 $1,225 $17,760 $18,985 $20,210 * @ 6.9 % interest Buy The Car, Cash Resale value: Car’s Services For 1 Yr.
$14,947** Car’s Services For 2 Yrs.
$13,538# ** MSRP - Depreciation = MSRP - MSRP * 0.194 = $18,545 * 0.806
# MSRP - Depreciation = MSRP - MSRP * 0.27 = $18,545 * 0.73
Llad Phillips Cost of Car’s Services: $4,038(1 Yr.) & $6,672(2 Yrs.) 3
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 4
Thousands of computers per year Y
GRAPHING POSSIBILITIES
PRODUCTION POSSIBILITY CURVE
Llad Phillips
Number of Space Missions Per Year X
5
$480 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) $ 0 0 hours Llad Phillips 24 hours Leisure (learning) 6
Thousands of computers per year Y
GRAPHING POSSIBILITIES
PRODUCTION POSSIBILITY CURVE
Llad Phillips
Number of Space Missions Per Year X
7
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 Llad Phillips 8
Price, Mortgage Rate 10 % 7 % Demand for Mortgage Credit Llad Phillips Quantity of Mortgage Credit 9
Price, Mortgage Rate 10 % Demand for Mortgage Credit Higher Personal Income Llad Phillips Quantity of Mortgage Credit 10
: Chapter Twenty
Conceptual Framework: Circular Flow Income Firms Households Labor Firms Supply Goods Households Demand Goods Income Perspective Expenditure Perspective Llad Phillips 11
Squares with Equal Sides and 45 degree Lines Income, Y Y = Y Y 1 Llad Phillips 45 0 Y 1 Income, Y 12
Chapter 20 Aggregate Expenditure, GDP Income = Expenditure Line GDP=Y GDP = C + I Total Expenditure Line Llad Phillips 45 0 GDP=Y Income,Y National Income, Y 13
The Economic Paradigm
describing the alternatives to choose among pricing the alternatives choosing the best alternative Llad Phillips 14
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 $ Llad Phillips 15
Review: Concepts
Circular Flow Lecture 6: income perspective & expenditure perspective Income = consumption + savings GDP = Consumption + investment Chapter 20 Present Value Lectures 1 & 5 Llad Phillips 16
: Chapter Twenty
Conceptual Framework: Circular Flow Income Firms Households Labor Firms Supply Goods Households Demand Goods Income Perspective Expenditure Perspective Llad Phillips 17
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 18
Economic Concept
present value of a stream of expected future net earnings, or profits, per share PV(t) = ENE(t) + ENE(t+1)/(1+i) may know this year’s net earnings, NE(t) your expectations of the future affect your best guess for next year, ENE(t+1) 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(t+1)/(1+i) + ENE(t+2)/(1+i) 2 + ...
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Part I
Buying a Car: Credit Buying a House Financial Planning Investment Llad Phillips 20
Cost of Using a Car for Several Years
Depreciation in car’s market value Interest opportunity cost of your money Llad Phillips 21
Mortgage Loans/Fixed Rate
Pay back the loan with declining balance of principal owed build equity(ownership) slowly Pay interest(price of credit) frontloaded Llad Phillips 22
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
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Financial Planning: Meeting Future Needs in Life(continued)
Retirement
Old Way: Social Security/Pension Plan insufficient income IRA’s/Employer Plans[401(k);403(b)] supplementary income Llad Phillips 24
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) Llad Phillips stock(equity) index fund 25
$480 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 $ 0 0 hours Llad Phillips 24 hours Leisure (learning) 26
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.
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Efficient Investment Portfolio
Reward: Average Rate of Return Market Determines the “Best” Tradeoff Between Reward and Risk Risk: Volatility Llad Phillips 28
Summary - Vocabulary - Concepts Lecture One
opportunity cost depreciation interest on principal lease loan services of a car Llad Phillips 29
Vocabulary - Concepts-Lecture Two
economic paradigm down payment loan term monthly payment annual percentage rate or APR equity personal financial planning life event analysis human capital assets liabilities net worth, wealth income expenditures savings Llad Phillips 30
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 Llad Phillips 31
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 Llad Phillips 32
Vocabulary-Concepts Lecture Five
capital asset pricing model market risk asset specific risk stock’s 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 33 Llad Phillips
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 Llad Phillips 34
Income Earned
Y PRODUCTION POSSIBILITY CURVE e
Scarce Resource: 24 Hours Per Day Llad Phillips
Chapters Studied X
35
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
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Part II: Chapter Three
Circular Flow Firms Income Households Labor Firms Supply Goods Households Demand Goods Labor Market Goods Market Llad Phillips 37
Chapter Three (continued)
absolute advantage comparative advantage Student Abby 1 hour per chapter 1 hour per lab Student Bobby 3 hours per chapter 1.5 hours 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 Llad Phillips 38
Chapter Four
price price demand/income, other prices price quantity/year demand price quantity/year demand supply Llad Phillips quantity/year
Chapter 20 Aggregate Expenditure, GDP Income = Expenditure Line GDP=Y GDP = C + I Total Expenditure Line Llad Phillips 45 0 GDP=Y Income,Y National Income, Y 40
Part II: Chapter Three
Circular Flow Firms Income Households Labor Firms Supply Goods Households Demand Goods Labor Market Income Perspective Goods Market Expenditure Perspective 41 Llad Phillips
Expenditure Perspective: 2 Legged Stool
Supply Goods Firms
Demand For Goods
Households Consumption Households: Consumption of Goods and Services Firms: Investment in Plant and Equipment Llad Phillips 42