01

Limits, Alternatives, and Choices

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Introduction

Economics defined
Economic wants exceed
productive capacity

LO1

A social science concerned

with making optimal choices
under conditions of scarcity

1-2

The Economic Perspective

LO1

Scarcity and
Choice

Purposeful
Behavior

Marginal
Analysis

Resources
are scarce
Choices must
be made
Opportunity
cost
Theres no
free lunch

Rational
self-interest
Individuals
and utility
Firms and
profit
Desired
outcomes

Marginal
benefit
Marginal cost
Marginal
means extra
MB and MC

1-3

Theories, Principles, and Models

The scientific method

Observe

Formulate a hypothesis

Test the hypothesis

Accept, reject, or modify the hypothesis

Continue to test the hypothesis, if necessary

LO2

Economic principles
Generalizations
Other-things-equal assumption
Graphical expression
1-4

Microeconomics and Macroeconomics

Microeconomics
Decision making by individual

LO3

units
Macroeconomics
Examines either the economy as
a whole or its basic subdivisions
or aggregates

1-5

Positive and Normative Economics

Positive economics
Deals with economic facts
Normative economics
A subjective perspective of the
economy

LO3

1-6

Individuals Economizing Problem

Limited income
Unlimited wants
A budget line
Attainable and unattainable options
Trade-offs and opportunity costs
Make the best choice possible
Change in income
LO4

1-7

Individuals Economizing Problem

12

DVDs
$20

Books
$10

6
5
4
3
2
1
0

0
2
4
6
8
10
12

10
Quantity of DVDs

$120 Budget

Income = $120
Pdvd = $20

=6

Unattainable
6
Income = $120

4
2

Pb = $10

Attainable

10

12

Quantity of Paperback Books

LO4

= 12

14

1-8

Societys Economizing Problem

Scarce resources
Land
Labor
Capital
Entrepreneurial Ability (takes
initiatives, makes decisions,
innovates, and takes risks)

LO4

1-9

Production Possibilities Model

Illustrates production choices

Assumptions
Full employment
Fixed resources
Fixed technology
Two goods

LO5

1-10

Production Possibilities Model

Production Alternatives
Type of Product

Pizzas

10

(in hundred thousands)

Industrial Robots
(in thousands)

Plot the Points to Create the Graph

LO5

1-11

Industrial Robots

Production Possibilities Model

14
13
12
11
10
9
8
7
6
5
4
3
2
1

Unattainable

The law of
increasing
opportunity
costs makes
the PPC
concave.

Attainable
E
0 1 2 3 4 5 6 7 8 9

Pizzas

LO5

1-12

Industrial Robots

A Growing Economy
14
13
12
11
10
9
8
7
6
5
4
3
2
1

A
B

Unattainable

A
B

Economic
Growth
D

Now Attainable

Attainable

E
0 1 2 3 4 5 6 7 8 9

Pizzas
LO6

1-13

Present Choices, Future Possibilities

LO6

Future
Curve

Current
Curve

Goods for the Future

Goods for the Future

Compare Two Hypothetical Economies

Future
Curve
F

Current
Curve

Goods for the Present

Goods for the Present

Presentville

Futureville

1-14

Pitfalls to Sound Economic Reasoning

Biases
Loaded terminology
Fallacy of composition
Post hoc fallacy
Correlation not causation

1-15