ECO 201/202 Principles of Economics Notes for Chapter 1: Limits, Alternatives, and Choices I. Chapter objectives a.

. Define economics b. Explain economic core concepts c. Identify and discuss the significance of the key points of the production possibilities model d. Use real-world examples to explain the law of increasing opportunity costs Economics defined a. The economic perspective i. Scarcity and choice 1. There are not enough resources (inputs) available to produce all of the goods and services that society would like to consume 2. Opportunity costs: the economic cost of something is the next best thing you must give up to get it a. You cant have it all b. Scarcity results in sacrifices ii. Purposeful behavior 1. Self-interest: the choices that are best for the individual who makes them 2. Selfishness and selflessness a. How might selfish behavior benefit the economy? b. How might selfless behavior benefit the economy? 3. Marginal analysis (see the additional example provided in course content module 1) a. The margin: a choice on the margin is a choice that is made by comparing all the relevant alternatives incrementally b. Marginal cost: the opportunity cost that arises from a one-unit increase in an activity c. Marginal benefit: the benefit that arises from a one-unit increase in an activity 4. Helpful hints a. Recognize that economic principles are generalizations they identify how a typical producer or consumer behaves b. Assume ceteris paribus isolate variables and simplify your economic analysis c. Use graphical expressions visually depict complex economic relationships b. The economic way of thinking for the individual i. An individuals reality 1. Individuals have limited resources

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a. Income b. Time 2. Individuals have unlimited wants a. Necessities b. Luxuries 3. Individuals have budget constraints ii. An individuals decision-making process 1. Individuals evaluate the opportunity cost of every decision 2. Individuals evaluate the utility generated by every decision 3. Individuals evaluate the marginal cost and marginal benefit of every decision c. The economic way of thinking for society i. Societys reality 1. Society has limited economic resources a. Land b. Labor i. Quantity number of workers in the workforce ii. Quality skills of the workforce iii. Why is it important to differentiate between the quantity of labor available to society and the quality of labor available to society? c. Capital d. Entrepreneurial ability 2. Society has unlimited wants ii. Societys decision-making process 1. Society evaluates the opportunity cost of every decision 2. Society evaluates the utility generated by every decision 3. Society evaluates the marginal cost and marginal benefit of every decision The production possibilities model (see the additional example provided in course content module 1) a. Production possibilities (PPC) defined: the alternative combinations of goods and services that can be produced (in a given time period) if all of societys resources are used efficiently i. Initial assumptions 1. Full employment 2. Fixed resources 3. Fixed technology 4. Two goods ii. Key points 1. Points that fall on the PPC a. Resources are fully employed

b. Represents maximum output of the two products c. An efficient outcome 2. Points that lie inside the PPC a. Resources are not fully employed b. Increased production is possible with the inputs available c. An inefficient outcome 3. Points that lie outside the PPC a. Production at this level is unattainable with the inputs available b. Additional resources are needed 4. Optimal points a. Consider satisfying current needs/wants b. Consider satisfying future needs/wants b. A graphical representation of scarcity and choice i. Scarcity the curve is a constraint ii. Choice when resources are fully employed increased production of one good means decreased production of the second good iii. Law of increasing opportunity costs the more of a product that society produces, the greater is the opportunity cost of obtaining an extra unit c. Shifting the PPC i. A growing economy ii. A shrinking economy