Transcript Review - UCSB Economics

Summary Review
Part I: 6 lectures & Guide to Personal
Finance
 Part II: Ch’s 1-4, 20 O’Sullivan & Sheffrin

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Review: Concepts

Opportunity Cost
 Lecture
1
 Chapter 1
 Chapter 2
 Chapter 3

Scarcity
 Lectures
3&4
 Chapter 1
 Chapter2
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Keep
Your
Money
* @ 6.9 % interest
Buy
The
Car,
Cash
This Year
Next Year
Year After
$17,760
$17,760
$17,760
$1,225*
$1,225
$1,225
$17,760
Resale value:
$18,985
$20,210
Car’s
Services
For 1 Yr.
Car’s
Services
For 2 Yrs.
$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.)
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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
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Y
Thousands
of
computers
per year
GRAPHING POSSIBILITIES
PRODUCTION POSSIBILITY
CURVE
X
Number of Space Missions Per Year
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Earnings
$480
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
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24 hours
Leisure
(learning)
6
Y
Thousands
of
computers
per year
GRAPHING POSSIBILITIES
PRODUCTION POSSIBILITY
CURVE
X
Number of Space Missions Per Year
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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
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Price,
Mortgage
Rate
10 %
Demand for Mortgage Credit
7%
Quantity of Mortgage Credit
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Price,
Mortgage
Rate
Demand for Mortgage Credit
Higher Personal Income
10 %
Quantity of Mortgage Credit
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: Chapter Twenty

Conceptual Framework: Circular Flow
Firms
Income
Firms
Labor
Supply
Goods
Demand
Goods
Households
Households
Income Perspective
Expenditure Perspective
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Squares with Equal Sides and 45 degree Lines
Y=Y
Income, Y
Y1
450
Y1
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Income, Y
12
Chapter 20
GDP=Y
Income = Expenditure Line
Aggregate
Expenditure, GDP
GDP = C + I
Total
Expenditure
Line
450
GDP=Y Income,Y
National Income, Y
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The Economic Paradigm
describing the alternatives to choose among
 pricing the alternatives
 choosing the best alternative

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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 $
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Review: Concepts

Circular Flow
 Lecture
6: income perspective & expenditure
perspective
 Income
= consumption + savings
 GDP = Consumption + investment
 Chapter

20
Present Value
 Lectures
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1&5
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: Chapter Twenty

Conceptual Framework: Circular Flow
Firms
Income
Firms
Labor
Supply
Goods
Demand
Goods
Households
Households
Income Perspective
Expenditure Perspective
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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
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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

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Cost of Using a Car for Several
Years
Depreciation in car’s market value
 Interest

 opportunity
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cost of your money
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Mortgage Loans/Fixed Rate

Pay back the loan with declining balance of
principal owed
 build

equity(ownership) slowly
Pay interest(price of credit)
 frontloaded
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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
 supplementary
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Plans[401(k);403(b)]
income
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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
 cash:
Portfolio Choices:
currency & checking account (SURVIVAL)
 money market funds(Treasury Bills: 13 wk-1 yr)
 bonds(Treasury Notes and Bonds: 2yr -30 yr)
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25
Earnings
$480
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
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24 hours
Leisure
(learning)
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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
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Summary - Vocabulary - Concepts
Lecture One
opportunity cost
 depreciation
 interest on principal
 lease
 loan
 services of a car

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Vocabulary - Concepts-Lecture Two

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
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economic paradigm
down payment
loan term
monthly payment
annual percentage rate or APR
equity
personal financial planning
life event analysis
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human capital
assets
liabilities
net worth, wealth
income
expenditures
savings
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Vocabulary-Concepts Lecture Three
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

median
demand curve
mortgage rate
personal income
mortgage credit
rule of correspondence

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
stock
inflow
outflow
time endowment
allocation of your time
 learning(leisure)

earning in future
 earning


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now
iso-preference curves
reservation wage
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Vocabulary-Concepts Lecture Four
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
Markowitz Portfolio
Analysis
stock index fund
bond fund
money market fund
guaranteed insurance
contract
monthly rate of return
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

capital gains
dividends
mean rate of return on
an asset
risk of holding an asset
a risk averse person
investment portfolio
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Vocabulary-Concepts Lecture Five
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

capital asset pricing
model
market risk
asset specific risk
stock’s beta, 
moving average
exponential growth
Dow Jones Industrials
present value
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
net earnings per share
expectations
discount factor
corporate profits after
taxes
business cycle
peak
trough
index of leading
indicators
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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
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Y
Income
Earned
PRODUCTION POSSIBILITY
CURVE
e
Scarce Resource:
24 Hours Per Day
X
Chapters Studied
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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 Market
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Firms
Labor
Supply
Goods
Demand
Goods
Households
Goods Market
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
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Bobby hacks
Each Specializes
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Chapter Four
price
price
quantity/year
price
demand
price
demand/income,
other prices
quantity/year
demand
supply
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quantity/year
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quantity/year
Chapter 20
GDP=Y
Income = Expenditure Line
Aggregate
Expenditure, GDP
GDP = C + I
Total
Expenditure
Line
450
GDP=Y Income,Y
National Income, Y
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Part II: Chapter Three

Circular Flow
Firms
Income
Firms
Labor
Households
Labor Market
Income Perspective
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Supply
Goods
Demand
Goods
Households
Goods Market
Expenditure Perspective
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Expenditure Perspective: 2Legged Stool
Firms
Supply
Goods
Demand
For Goods
Consumption
Households
Households: Consumption of Goods and Services
Firms: Investment in Plant and Equipment
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