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

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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