Chapter 1
Limits,
Alternatives,
and Choices
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
• Economics defined
• Role of economic theory
• Microeconomics vs.
macroeconomics
• Resource scarcity and the
economizing problem
• Production possibilities model
1-2
Economics Defined
• Economic wants exceed
productive capacity
• Social science concerned with
making optimal choices under
conditions of scarcity
1-3
The Economic Perspective
• Thinking like an economist
• Key features:
–Scarcity and choice
–Purposeful behavior
–Marginal analysis
1-4
Scarcity and Choice
•
•
•
•
Resources are scarce
Choices must be made
There is no free lunch
Opportunity cost
1-5
Purposeful Behavior
•
•
•
•
Rational self-interest
Individuals and utility
Firms and profit
Desired outcomes
1-6
Marginal Analysis
•
•
•
•
Marginal benefit
Marginal cost
Marginal means extra
Comparison of marginal benefit
and marginal cost
1-7
Economic Models
•
•
•
•
•
•
The scientific method
Cause and effect
Economic principles
Simplification of reality
Other-things-equal assumption
Graphical expression
1-8
Macro vs. Micro
• Macroeconomics
–Aggregate
• Microeconomics
–Individual Units
• Positive Economics
• Normative Economics
1-9
Individual’s Economizing Problem
•
•
•
•
•
•
Limited income
Unlimited wants
A budget line
Tradeoffs & opportunity costs
Make best choice possible
Change in income
1-10
A Budget Line
DVDs Books
$20
$10
6
5
4
3
2
1
0
0
2
4
6
8
10
12
12
10
Quantity of DVDs
$120 Budget
Income = $120
=6
Pdvd = $20
8
Unattainable
6
Income = $120
4
Pb = $10
2
0
= 12
Attainable
2
4
6
8
10
12
Quantity of Paperback Books
14
1-11
Society’s Economizing Problem
• Scarce resources
–Land
–Labor
–Capital
–Entrepreneurial Ability
• Factors of production
1-12
Production Possibilities Model
• Illustrate production choices
• Assumptions:
–Full employment
–Fixed resources
–Fixed technology
–Two goods
1-13
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…
1-14
Industrial Robots
Production Possibilities Curve
A’
14
13
12
11
10
9
8
7
6
5
4
3
2
1
B’
Unattainable
A
Economic
Growth
C’
B
C
D’
D
Now Attainable
Attainable
E’
E
0
1
2
3
4
5
6
7
8 9
Pizzas
1-15
Industrial Robots
Production Possibilities Curve
A’
14
13
12
11
10
9
8
7
6
5
4
3
2
1
B’
Unattainable
A
Law of Increasing
Opportunity Cost
C’
B
C
D’
Shape of
the Curve
D
Attainable
E’
E
0
1
2
3
4
5
6
7
8 9
Pizzas
1-16
Industrial Robots
Production Possibilities Curve
A’
14
13
12
11
10
9
8
7
6
5
4
3
2
1
B’
Unattainable
C’
U
D’
Under or
Unemployment
E’
0
1
2
3
4
5
6
7
8 9
Pizzas
1-17
The Future Economy
• Consequences of unemployment
• Economic growth
–More resources
–Better quality resources
–Technological advances
1-18
Future
Curve
Current
Curve
P
Goods for the Present
Presentville
Goods for the Future
Goods for the Future
Future Possibilities
Future
Curve
F
Current
Curve
Goods for the Present
Futureville
1-19
International Trade
•
•
•
•
Production point
Consumption point
Specialization
Preview
1-20
Marginal Benefit & Marginal Cost
Optimal Allocation of Resources
15
a
c
MC
MB = MC
e
10
5
b
d
MB
0
1
2
3
Quantity of Pizza
1-21
LAST Word:
Pitfalls to Sound Economic Reasoning
•
•
•
•
•
Biases
Loaded terminology
Fallacy of composition
Post hoc fallacy
Correlation but not causation
1-22
Key Terms
•
•
•
•
•
•
•
•
•
•
•
•
•
•
economics
economic perspective
opportunity cost
utility
marginal analysis
scientific method
economic principle
other-things-equal
assumption
macroeconomics
aggregate
microeconomics
positive economics
normative economics
economizing problem
•
•
•
•
•
•
•
•
•
•
•
•
budget line
economic resources
land
labor
capital
investment
entrepreneurial ability
factors of production
consumer goods
capital goods
production possibilities curve
law of increasing opportunity
costs
• economic growth
1-23
The Market
System and the
Circular Flow
1-24