Introduction to Economics
Outline: Lecture One
Information About the Course
 Elements of Personal Finance

 Buying
Llad Phillips
or Leasing a Car
1
Economics 109
Llad Phillips
Introduction to Economics
Fall 1998
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)
Labs(sections)
in the Micro Computer Lab(MCL)
11189 F 9:00-9:50 P333 Lab, Phelps 1526, JD
11197 M 7:00-7:50 PM P333 Lab, Phelps 1526, JA
11205 W 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
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
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
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
Introduction to Economics
Elements of Personal Finance
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Elements of Personal Finance

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
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Buying or Leasing a Car

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
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Economic Concept: Consumer
Durable, e.g. car, refrigerator

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
 resale
value declines each year
 How
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does this affect choice of which car to buy?
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Sources of Information

Kelley Blue Book: Used Car Guide
 bookstores

Kelley Blue Book: Internet
 Universal
Resource Locator(URL)
 http://www.kbb.com/

Manufactuters
 Nissan
 http://www.nissan-usa.com/
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Kelley Blue Book
Kelley Blue Book
Kelley Blue Book
http://www.nissan-usa.com/
Economic Decision Making

choice of a vehicle
 Nissan Altima
XE 4-Dr Sedan
 Ford Taurus 4-Dr Sedan

choice of payment method
 cash
 lease
 payment
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plan
16
Economists Assume You Know
What You Like

Lingo: economists call these consumer
tastes or consumer preferences
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Economists Assume You Can
make Comparisons

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.
 dealer invoice (with destination charge)
 Altima: $14,641
 Taurus: $17,171
 manufacturer’s suggested retail price (MSRP)
 Altima: $16,219
 Taurus: $18,545
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Economists Assume You Can
Make Tradeoffs

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
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Economics Framework: Converting Data
Into Useful Information for Decisions
Kelley’s
Prices
Data
Nissan’s
Specs
Framework
“Your Tastes”
Decision:
Choice of
Vehicle
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Information
20
Economics Framework: Converting Data
Into Useful Information for Decisions
?
Data
?
Framework
Decision:
Choice of
Payment
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Information
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Choice of Payment Method
cash
 lease
 loan

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http://www.fordcredit.com/nafo/rcl/agreement.html
Walnut Creek Dealer: 1996, Ford Taurus, $16,488
Example

5,976 + tax
249 + tax

Example
249 + tax
24 months
5,976 + tax
Depreciation: Taurus, GL Sedan
Year
1996
1995
1994
1993
1992
1991
1990
MSRP
18,545
18,295
18,280
17,675
17,619
16,595
16,054
Kelley* Depreciation
14,750
13,350
11,700
10,200
8,800
7,750
3,545
4,930
5,975
7,419
7,795
8,304
* Excellent Condition
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Depreciation: Taurus
Depreciation, $
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
0
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2
4
Age of Vehicle
6
27
Taurus Depreciation As Fraction of
MSRP
0.6
0.5
Fraction
0.4
0.3
0.2
0.1
0
0
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2
4
Age of Vehicle
6
28
Choice: cash
purchase price: $16,488
 tax at 7.5 %: $1,237
 documents: $35
 total: $17,760

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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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Note:

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.
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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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Economics Framework: Converting Data
Into Useful Information for Decisions
?
Data
?
Framework:
Depreciation
Foregone Interest
Decision:
Choice of
Payment
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Information
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Choice: Lease
drive-off costs(payments due at lease
signing): $2,136.77
 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
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Buy The This Year
Car, Cash
Next Year
Year After
foregone interest on $17,760: $1,225*
depreciation:
$2,813#
* @ 6.9 % interest
$4,038
$2,450
$4,222
$6,672
# price+tax-blue book = $17,760 - 0.806*$18,545
Lease, 24 months
total drive-off:
$2,137
$2,137
total monthly payments @$302/m.: $3,624
$147
foregone interest on $2,137**:
$7,248
$294
$5908
$9679
** Assumes no opportunity cost of monthly payments
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Example: Buying a New ‘96
Taurus: Advertised Price $16488

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
 monthly
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payment ( $698.77)
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Choice: Two year Loan @ 6.9%

Loan Cost = Principal + Interest = $16,771
 principal
= loan =$15,623
 interest = $1,148

Resale Value After 2 Years

0.73*$18,545 = $13,538
foregone interest on $2137: $294
 total cost = $5,664

 $16,771
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- $13,538 + $294
37
Cost of Using a ‘96 Taurus for 2 Yrs.
Cost item
foregone interest
depreciation
total drive-off
monthly payments
down payment
monthly payments blue book**
total
Cash Lease Loan
$2,450
$294 $294
$4,222
$2,137
$7,428*
$2,137
$3,233
$6,672 $9,679 $5,664
* residual value: $11,480
** blue book: $13,538
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Summary - Vocabulary - Concepts
opportunity cost
 depreciation
 interest on principal
 lease
 loan
 services of a car

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http://www/latimes.com
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SCARCITY AND PRODUCTION
POSSIBILITY CURVES

Production Possibility Curve
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.
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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.
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WHAT ARE RESOURCES?
Labor
-- human effort used to produce
 Production facilities (PHYSICAL CAPITAL)
-- factories, offices, stores, restaurants
• Human Capital
-- knowledge and skills acquired by workers
 Natural Resources (LAND)
-- things created by acts of nature and used
to produce

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GRAPHING POSSIBILITIES
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Y
GRAPHING POSSIBILITIES
X
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Y
GRAPHING POSSIBILITIES
Thousands
of
computers
per year
X
Number of Space Missions Per Year
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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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Y
Thousands
of
computers
per year
380
GRAPHING POSSIBILITIES
PRODUCTION POSSIBILITY
CURVE
e
4
Number of Space Missions Per Year
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X
48
Y
GRAPHING POSSIBILITIES
Thousands
of
computers
per year
380
300
PRODUCTION POSSIBILITY
CURVE
e
f
4
5
Number of Space Missions Per Year
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X
49