Your Human Capital Aa Aaron Stevens EC1 EC171 71, , 13 13 September 2011 1 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
Recal Recall: Tw Two o Peri eriod od Li Lifet etime me Bu Budget Constraint* Youth: Cy + S = W Old Age: Co = S By algebraic magic: Co = W - Cy or Cy + Co = W *N *No Investment Return *No Taxes and/or Benefits *N The The Busi usiness ness of of You, Inc. As Assets Liabi Li abilities es + Cash - Short term debts + Securities - Long term debts + Property = Tota = otal Conve onventi ntiona onal As Assets = = Tota otal Conve onventi ntiona onal Li Liabiliti ties Conven entional NW = Co Conv. Asset ets - Co Conv. Liabilities es + Huma man Capital Econom Econ omic N c Net et Wo Worth = CNW + HC
The The Busi usiness ness of of You, Inc. Hu Human n Capital is the asset which enables enabl es you you to to gener generate ate labor abor incom ncome. e. When you’re young, Human Capital is the most valuable asset of You, Inc. • invest in it • maximize it • protect it 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 of 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/
Investin In ing in in Huma Human n Ca Capital Consider a college degree as an investment in human capital. Worst-case scenario? • Do the fun & easy Value Value stuff in college • Re Retirement A ge ge Yo Youth Yo Youth (age (a e 67) (ag age 19) (a (age e 23) Colleges happily train students for exciting careers in fields where there are no jobs! In Investin ing in in Huma Human n Ca Capital Consider a college degree as an investment in human capital. Best-case scenario? Invest i In vest in essen essenti tial al sk skills that s that • add to add to your your hum human an capi capital tal. • (d (do the hard rd stuff in colle llege) Value Value • A ge Retirement Re ge Youth Yo Yo Youth (age (a e 67) (ag age 19) (a (age e 23)
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
Wh Why do do doctors get paid so so much? uch? • Smart • Specialized training Opportunity cos Op 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?
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? Scarcity Sc 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!
De Demand The The do downwar ard- d-slopi ping g suppl upply y cur curve. e. A lower price will induce buyers to buy more quantity. A scarcity Price Price • P1 P1 abundance • P2 P2 Demand De Q1 Q1 Q2 Q2 Quantity Quantity De Demanded Notice: the No 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. Sup Supply 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. scarcity Supply Supply Price Price • P2 P2 • P1 P1 abundance Q1 Q1 Q2 Q2 Quantity Quantity Supplied Supplied 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.
Equilibri Equi brium um Pri rice ce Ma Market price is determined by the intersection of the supply and an d dem deman and. d. Pri Prices ces adj adjus ust un until they hey reach reach “eq equilibrium”. Supply Supply Price Price P Demand De Q Quantity Quantity Fo For a a g good e d elaboration, se see t the Wi Wikipedia pa page on “ Su Supply and demand”. To be To be thorough ughly conf nfus used, see any ny microecono nomics text xtbo book. k. 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
Sc Scarcity: Pl Plumb umbing ng Edi dition on 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 o Inv nvest in n Your our 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
Va Valui uing ng Fut Futur ure Inc ncome ome 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
Announc Announceme ment nts and nd To o 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
Pe Peop ople Ha Hate The Their Job obs!
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