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Limits, Alternatives, and Choices
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Introduction
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Economics defined:
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Economic wants exceed
productive capacity.
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Use resources efficiently to
maximize fulfillment of
unlimited wants.
The Economic Perspective
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Key features:
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Scarcity and choice
Purposeful Behavior
Marginal Analysis
Scarcity and Choice
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Resources are scarce
Choices must be made
Opportunity cost
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There’s no free lunch
Purposeful Behavior
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Rational self-interest
Utility
Desired outcomes
Marginal Analysis
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Compare marginal benefit and
marginal cost
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Marginal means “extra”
Theories, Principles, and Models
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Economic principles and theories
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Generalizations, so imprecise
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Statements of economic
behavior supported by facts
Ceteris Paribus: Other-thingsequal assumption
Microeconomics and Macroeconomics
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Microeconomics
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Macroeconomics
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Decision making by individual
units
Aggregate, total
Positive and Normative Economics
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Positive economics
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Normative economics
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Deals with economic facts
Subjective perspective of
economy
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Society’s Economizing Problem
Scarce resources – inputs used to
produce other goods and services
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Land – natural resources
Labor – most workers
Capital – manufactured inputs
• Not money
• Investment – spending on production
& accumulation of capital
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Society’s Economizing Problem
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Entrepreneurial ability
• Takes initiative
• Decision maker
• Innovator
• Takes risk
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Key to economic growth
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Production Possibilities Model
Shows maximum combinations of 2
goods that can be produced when
the economy is efficient.
Assumptions:
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Full employment
Fixed resources
Fixed technology
Two goods
Production Possibilities Table
Production Alternatives
Type of Product
Pizzas
A
B
C
D
E
0
1
2
3
4
10
9
7
4
0
(in hundred thousands)
Industrial Robots
(in thousands)
Plot Points to Create Graph…
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A Growing Economy
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Economic Growth
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More resources
Improved resource quality
Technological advances
International Trade
• Specialization
• Increased production possibilities
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