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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 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.) Llad Phillips 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 Y Thousands of computers per year GRAPHING POSSIBILITIES PRODUCTION POSSIBILITY CURVE X Number of Space Missions Per Year Llad Phillips 5 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 Llad Phillips 24 hours Leisure (learning) 6 Y Thousands of computers per year GRAPHING POSSIBILITIES PRODUCTION POSSIBILITY CURVE X Number of Space Missions Per Year Llad Phillips 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 % Demand for Mortgage Credit 7% Quantity of Mortgage Credit Llad Phillips 9 Price, Mortgage Rate Demand for Mortgage Credit Higher Personal Income 10 % Quantity of Mortgage Credit Llad Phillips 10 : Chapter Twenty Conceptual Framework: Circular Flow Firms Income Firms Labor Supply Goods Demand Goods Households Households Income Perspective Expenditure Perspective Llad Phillips 11 Squares with Equal Sides and 45 degree Lines Y=Y Income, Y Y1 450 Y1 Llad Phillips 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 Llad Phillips 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 Llad Phillips 1&5 16 : Chapter Twenty Conceptual Framework: Circular Flow Firms Income Firms Labor Supply Goods Demand Goods Households Households 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 + ... Llad Phillips 19 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 Llad Phillips cost of your money 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 Llad Phillips 23 Financial Planning: Meeting Future Needs in Life(continued) Retirement Old Way: Social Security/Pension Plan insufficient income IRA’s/Employer supplementary Llad Phillips Plans[401(k);403(b)] income 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 cash: Portfolio Choices: 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 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 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. Llad Phillips 27 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 Llad Phillips human capital assets liabilities net worth, wealth income expenditures savings 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 Llad Phillips now iso-preference curves reservation wage 31 Vocabulary-Concepts Lecture Four Markowitz Portfolio Analysis stock index fund bond fund money market fund guaranteed insurance contract monthly rate of return Llad Phillips capital gains dividends mean rate of return on an asset risk of holding an asset a risk averse person investment portfolio 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 Llad Phillips net earnings per share expectations discount factor corporate profits after taxes business cycle peak trough index of leading indicators 33 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 Y Income Earned PRODUCTION POSSIBILITY CURVE e Scarce Resource: 24 Hours Per Day X Chapters Studied Llad Phillips 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 Llad Phillips 36 Part II: Chapter Three Circular Flow Firms Income Households Labor Market Llad Phillips 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 Llad Phillips Bobby hacks Each Specializes 38 Chapter Four price price quantity/year price demand price demand/income, other prices quantity/year demand supply Llad Phillips quantity/year 39 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 Llad Phillips 40 Part II: Chapter Three Circular Flow Firms Income Firms Labor Households Labor Market Income Perspective Llad Phillips Supply Goods Demand Goods Households Goods Market Expenditure Perspective 41 Expenditure Perspective: 2Legged Stool Firms Supply Goods Demand For Goods Consumption Households Households: Consumption of Goods and Services Firms: Investment in Plant and Equipment Llad Phillips 42