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

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

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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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  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) RPx = relative price of good x NPx = nominal price of good x NPb = nominal price of the base commodity

  6. Example: • Tuition and Fees for In-State Undergraduate Residents at Selected Schools by semester, 2009-2010 (15 credits): • NPuofu = $2,902 • NPusu = $2,414 • NPuofc = $4,243 • 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 • RPuofu = $2,902 / $2,902 = 1.0 • RPusu = $2,414 / $2,902 = 0.83 • RPuofc = $4,243 / $2,902 = 1.46 • Meaning of relative prices… • The price of attending the University of Colorado is 1.46 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.

  10. http://en.wikipedia.org/wiki/Image:US_Historical_Inflation.svghttp://en.wikipedia.org/wiki/Image:US_Historical_Inflation.svg January 1914 – March 2009

  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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