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

• A social science concerned with making optimal choices under conditions of scarcity

LO1 1-2

The Economic PerspectiveScarcity and Choice

Purposeful Behavior

Marginal Analysis

• Resources are scarce

• Rational self-interest

• Marginal benefit

• Choices must be made

• Individuals and utility

• Marginal cost

• Opportunity cost

• Firms and profit

• Marginal means extra

• There’s no free lunch

• Desired outcomes

• MB and MC

LO1 1-3

Theories, Principles, and Models

• The scientific method

• Economic principles• Generalizations• Other-things-equal assumption• Graphical expression

Observe Formulate a hypothesis Test the hypothesis

Accept, reject, or modify the hypothesis

Continue to test the hypothesis, if necessary

LO2 1-4

Microeconomics and Macroeconomics

• Microeconomics• Decision making by individual

units• Macroeconomics

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

LO3 1-5

Positive and Normative Economics

• Positive economics

• Deals with economic facts

• Normative economics

• A subjective perspective of the economy

LO3 1-6

Individual’s 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

Individual’s Economizing Problem

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1012

DVDs$20

Books$10

$120 Budget 12

10

8

6

4

2

02 4 6 8 10 12 14Quantity of Paperback Books

Qua

ntity

of D

VDs

Income = $120Pdvd = $20

= 6

Income = $120Pb = $10

= 12

Attainable

Unattainable

LO4 1-8

Society’s 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

Type of Product

Pizzas (in hundred thousands)

Industrial Robots (in thousands)

Production Alternatives

A B C D E

10 9 7 4 0

0 1 2 3 4

Plot the Points to Create the Graph…

Production Possibilities Model

LO5 1-11

Pizzas

Indu

stria

l Rob

ots

Attainable

0 1 2 3 4 5 6 7 8 9

1413121110 9 8 7 6 5 4 3 2 1

Unattainable

AB

C

D

E

U

The law of increasing opportunity costs makes the PPC concave.

Production Possibilities Model

LO5 1-12

A Growing Economy

Pizzas

Indu

stria

l Rob

ots

Attainable

0 1 2 3 4 5 6 7 8 9

1413121110 9 8 7 6 5 4 3 2 1

Unattainable

AB

C

D

E

EconomicGrowth

Now Attainable

A’

B’

C’

D’

E’

LO6 1-13

Present Choices, Future Possibilities

Goods for the Present

Good

s for

the

Futu

re

Good

s for

the

Futu

re

Goods for the Present

P

F

CurrentCurve

CurrentCurve

FutureCurve

FutureCurve

Presentville Futureville

Compare Two Hypothetical Economies

LO6 1-14

Pitfalls to Sound Economic Reasoning

• Biases

• Loaded terminology

• Fallacy of composition

• Post hoc fallacy

• Correlation not causation

1-15