Wh What Youll ll Learn arn To Today Just Just go going to - - PDF document

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Your Human Capital Aa Aaron Stevens EC1 EC171 71, , 13 13 September 2011 1 Wh What Youll ll Learn arn To Today Just Just go going to college d doesnt ne necessa ssari rily ly bui uild ld Hum uman n Capi pita

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1

Aa Aaron Stevens EC1 EC171 71, , 13 13 September 2011

Your Human Capital

Wh What You’ll ll Learn arn To Today

Just Just “go going to college” d doesn’t ne necessa ssari rily ly bui uild ld Hum uman n Capi pita tal! l! Op Opportunity Cost Sc Scar arcity y Val Value Ho How w to invest in yo your Hu Human an Cap Capital al

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SLIDE 2

Recal Recall: Tw Two

  • Peri

eriod

  • d

Li Lifet etime me Bu Budget Constraint*

Youth: Cy + S = W Old Age: Co = S By algebraic magic: Co = W - Cy

  • r

Cy + Co = W

*N *No Investment Return *N *No Taxes and/or Benefits

The The Busi usiness ness of

  • f You, Inc.

Li Liabi abilities es

  • Short term debts
  • Long term debts

= = Tota

  • tal Conve
  • nventi

ntiona

  • nal Li

Liabiliti ties

+ Huma man Capital Conven entional NW = Co

  • Conv. Asset

ets - Co

  • Conv. Liabilities

es

Econ Econom

  • mic N

c Net et Wo Worth = CNW + HC

As Assets + Cash + Securities + Property = = Tota

  • tal Conve
  • nventi

ntiona

  • nal As

Assets

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SLIDE 3

The The Busi usiness ness of

  • f You, Inc.

When you’re young, Human Capital is the most valuable asset of You, Inc.

  • invest in it
  • maximize it
  • protect it

Hu Human n Capital is the asset which enabl enables es you you to to gener generate ate labor abor incom ncome. e.

In Investin ing in in H Human C Capit ital Does having a college degree add to your human capital?

Report: College students not learning much “A study of more than 2,300 undergraduates found 45 percent of students show no significant improvement in the key measures of critical thinking, complex reasoning and writing by the end

  • f their sophomore years.”

http ttp://w //www.ms msnbc. c.ms msn.com/id com/id/4 /41136935/n /ns/u /us_n _news-educa cation tion/

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SLIDE 4

In Investin ing in in Huma Human n Ca Capital

Consider a college degree as an investment in human capital. Worst-case scenario? Colleges happily train students for exciting careers in fields where there are no jobs!

Re Retirement (a (age e 67)

Value Value Age

ge

  • Yo

Youth (ag age 19) Yo Youth (a (age e 23)

Do the fun & easy stuff in college

In Investin ing in in Huma Human n Ca Capital

Consider a college degree as an investment in human capital. Best-case scenario?

Re Retirement (a (age e 67)

Value Value Age

ge

  • Yo

Youth (ag age 19) Yo Youth (a (age e 23)

  • In

Invest i vest in essen essenti tial al sk skills that s that add add to to your your hum human an capi capital tal. (d (do the hard rd stuff in colle llege)

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SLIDE 5

Be Become me a Br Brain Su Surgeon

  • have to be smart & hard-working
  • 4 year bachelor degree in hard science
  • 4 year medical degree at top school
  • 6 year residency in neurosurgery
  • 1-2 years advanced study
  • pass state licensing exam
  • become board certified
  • (borrow a lot of money to pay for 15

years of schooling with no/minimal income)

Be Become me an Au Auto Me Mechanic

complete high school

  • work for 2 years as an paid apprentice
  • take ASE exam
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SLIDE 6

Wh Why do do doctors get paid so so much? uch?

  • Smart
  • Specialized training

Op Opportunity cos cost

Op Opportunity cost is the value of the next best alternative forgone as the result of making a decision.

What are the opportunity costs of going to college? Of becoming a doctor? Of becoming a brain surgeon?

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SLIDE 7

Wh Why does coffee cost so muc much h at St Starbuc ucks?

Why does a cappuccino $4? It costs about 40 cents to make a cup of drip coffee, and about a dollar for a

  • cappuccino. Where is all this money going?

Sc Scarcity

The main reason Starbucks can charge $4 for a coffee is that there isn’t another shop next door charging $1 or $2. Why not? Starbucks most strategic advantage is its well-trafficked locations. What is Starbucks’ biggest expense? Rent. Why is rent so high? Great locations are scarce!

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SLIDE 8

De Demand

  • Price

Price Quantity Quantity De Demanded

  • P1

P1 P2 P2 Q1 Q1 Q2 Q2

The The do downwar ard- d-slopi ping g suppl upply y cur curve. e. A A lower price will induce buyers to buy more quantity. No Notice: the he quantity is is drawn on the X-axis, even though quan quantity y dem deman anded ded is a a fun unct ction of pri price. ce.

De Demand

scarcity abundance

Sup Supply

  • Price

Price Quantity Quantity Supplied Supplied

  • P1

P1 P2 P2 Q1 Q1 Q2 Q2

The The upw upwar ard- d-slopi ping g suppl upply y cur curve. e. A A hi highe her price will induce vendors to sell more quantity. No Notice: the he quantity is is drawn on the X-axis, even though quan quantity y suppl upplied ed is a a fun unct ction of pri price. ce.

Supply Supply

scarcity abundance

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SLIDE 9

Equi Equilibri brium um Pri rice ce

Price Price Quantity Quantity

P Q

Ma Market price is determined by the intersection of the supply an and d dem deman and.

  • d. Pri

Prices ces adj adjus ust un until they hey reach reach “eq equilibrium”.

Fo For a a g good e d elaboration, se see t the Wi Wikipedia pa page on “Su Supply and demand”. To To be be thorough ughly conf nfus used, see any ny microecono nomics text xtbo book. k.

Supply Supply De Demand

Wh Why do do plumbers get paid so so much? uch?

Boston-area plumbers get $125-$250/hour. Why do plumbers get paid so much?

  • smart
  • specialized training
  • opportunity cost
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SLIDE 10

Sc Scarcity: Pl Plumb umbing ng Edi dition

  • n

Why do plumbers get paid so much? Because have created and protected the scarcity value of the trade.

  • Licensing and permit requirements

(economists call these “barriers to entry”)

  • Low employment status

“You’re going to be a plumber? What kind of a job is that for a nice __________ boy/girl?”

How How to

  • Inv

nvest in n Your

  • ur

Huma Human n Ca Capital

Your goal is to capture the sc scarcity va value at a mi minimum opportunity cost.

Find something hard that you like, but that others don’t want to do or cannot do.

  • think about scarcity and barrier

ers to en entry

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SLIDE 11

Va Valui uing ng Fut Futur ure Inc ncome

  • me

How do we value HC today when the money is to be received in the future? Is income to be received in the future worth more today, or less today? Why?

Wh What You Learned Today

Just Just “go going to college” d doesn’t ne necessa ssari rily ly bui uild ld Hum uman n Capi pita tal! l! Op Opportunity Cost Sc Scar arcity y Val Value Ho How w to invest in yo your Hu Human an Cap Capital al

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SLIDE 12

Announc Announceme ment nts and nd To

  • Do

Do

Readings:

  • Wikiped

edia: rea ead Scarcity, Supply and Dema emand

  • Financial Ec

Economi mics, ch ch 4 (on web ebsite) e). Beg egin rea eading fo for Thursday, continue e nex ext week eek. We e will be e using Microsoft ft Ex Excel el nex ext time me to do some me calculations; bring your laptop if f you can.

  • Watch the

e Ex Excel el tutorial video eos (on web ebsite) e) if you don you don’t know Ex Excel el Homew mework 1: Estima mate e your huma man capital due. e.

Wh What Happens to Earnings Ov Over Time me?

ht http://www. //www.ss ssa.g .gov/policy/docs/rsnotes/rsn2008-04.html

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SLIDE 13

Pe Peop

  • ple Ha

Hate The Their Job

  • bs!