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Proverb #4: Just because you don’t pay for something doesn’t mean it’s not costly -- TANSTAAFL.

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Presentation on theme: "Proverb #4: Just because you don’t pay for something doesn’t mean it’s not costly -- TANSTAAFL."— Presentation transcript:

1 Proverb #4: Just because you don’t pay for something doesn’t mean it’s not costly -- TANSTAAFL

2 Types of Imputed Costs & Benefits: Imputed interest costs the cost of having your money tied up in a particular resource when it could be earning interest elsewhere. Imputed depreciation the decline in the value of a resource over time. Imputed appreciation the increase in the value of a resource over time.

3 Example of imputed interest cost: Purchasing a new car using cash. What’s the full price of the purchase? List price: $15,000 Savings interest rate = 5% /yr You would have otherwise kept the money in the bank for 5 more years if you had not used it to purchase the car Then, the imputed interest costs of paying cash… loss of $15,000(1+.05) 5 = $19,144 imputed interest costs are: $19,144-$15,000= $4,144

4 Example: In some instances, the imputed interest costs may be so high that it is better to borrow money rather than use your savings… Suppose a 12% annual interest paid on invested money Suppose a 9% annual interest for a secured car loan net gain of $15,000*(.03) = $450 in year 1 Be cautious if using this approach – fairly risky

5 Proverb #5: Everything’s relative Relative prices - the price of one commodity compared to the price of another commodity (i.e., the base commodity) RP x = relative price of good x NP x = nominal price of good x NP b = nominal price of the base commodity

6 Example: Tuition and Fees for In-State Undergraduate Residents at Selected Schools by semester, (15 credits): NP uofu = $3, NP usu = $2, NP uofc = $5,120 The relative price shows how tuition and fees compare to the base school...

7 Example (cont.): Using the U of U as the Base Commodity RP uofu = $3, / $3, = 1.0 RP usu = $2, / $3, = 0.70 RP uofc = $5,120 / $3,917.5 = 1.31 Meaning of relative prices… The price of attending the University of Colorado is 1.31 times the price of attending the University of Utah

8 Most common relative price comparison? Inflation - the general rate at which the price of a particular good/service or a group of goods/services increases over a specified period of time. Bottom Line – the purchasing power of the dollar declines over time

9 Inflation measures the purchasing power of a dollar at different points in time. In other words, inflation measures the $ you would need to have in year Y+1 to purchase the same basket of goods/services that you purchased in year Y.

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11 Related Concepts... Escalating Inflation (Increasing Inflation Rates) prices rise at an increasing rate 3%, 4%, 7% Disinflation (Decreasing Inflation Rates) prices rise at a decreasing rate 6%, 5%, 3.5% Deflation (Prices Decreasing) prices decline -1%, -2%, -1%

12 5 Important Components of Goals (SMART): Specific Measurable Attainable Realistic Timely


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