CHAPTER 1
Limits, Alternatives, and Choices
Quick Review 1.1:
• Economics examines how individuals,
institutions, and society make choices
under conditions of scarcity.
• The economic perspective stresses (a)
resource scarcity and the necessity of
making choices, (b) the assumption of
purposeful (or rational) behaviour, and
(c) comparisons of marginal benefit and
marginal cost.
• In choosing among alternatives,
people incur opportunity costs—the
value of their next-best option.
• Economists use the scientific method
to establish economic theories—cause-
Quick Review 1.2:
• Because wants exceed incomes,
individuals face an
economizing problem; they must decide
what to buy and
what to forgo.
• A budget line (budget constraint)
shows the various combinations
of two goods that a consumer can
purchase with a
specific money income.
• Straight-line budget constraints imply
constant opportunity
costs associated with obtaining more of
either of the two
goods.
effect generalizations about the
economic behaviour of individuals and
Quick Review 1.3:
institutions.
• Economists categorize economic
• Microeconomics focuses on specific
resources as land, labor,
decision-making units of the economy,
capital, and entrepreneurial ability.
macroeconomics examines the economy
• The production possibilities curve
as a whole.
illustrates several ideas:
• Positive economics deals with factual
(a) scarcity of resources is implied by
statements (“what is”);
the area of unattainable
normative economics involves value
combinations of output lying outside the
judgments (“what ought
production
to be”).
possibilities curve; (b) choice among
• International specialization and trade
outputs is reflected in
enable a nation to obtain more goods
the variety of attainable combinations of
than its production possibilities curve
goods lying along
indicates.
the curve; (c) opportunity cost is
illustrated by the downward slope of the
curve; (d) the law of increasing
opportunity costs is implied by the
bowed-outward shape of the
curve.
• A comparison of marginal benefits and
marginal costs is needed to determine
the best or optimal output mix on a
production possibilities curve.
Summary
1. Economics is the social science that
examines how individuals, institutions,
and society make optimal choices under
conditions of scarcity. Central to
economics is the idea of opportunity
cost: the value of the good, service, or
time forgone to obtain something else.
2. The economic perspective includes
three elements: scarcity and choice,
Quick Review 1.4:
purposeful behaviour, and marginal
• Unemployment causes an economy to
analysis. It sees individuals and
operate at a point inside its production
institutions making rational decisions
possibilities curve.
based on comparisons of marginal costs
• Increases in resource supplies,
and marginal benefits.
improvements in resource quality, and
3. Economists employ the scientifific
technological advance cause economic
method, in which they form and test
growth, which is depicted as an outward
hypotheses of cause-and-effect
shift of the production possibilities
relationships to generate theories, laws,
curve.
and principles. Economists often
• An economy’s present choice of capital
combine theories into representations
and consumer goods helps determine
called models.
the future location of its production
4. Microeconomics examines the
possibilities curve.
decision making of specific
economic units or institutions.
9. Economists illustrate society’s
Macroeconomics looks at the economy
economizing problem
as a whole or its major aggregates.
through production possibilities analysis.
5. Positive economic analysis deals with
Production possibilities tables and
facts; normative economics reflects
curves show the different combinations
value judgments.
of goods and services that can be
6. Individuals face an economizing
produced in a fully employed economy,
problem. Because their wants exceed
assuming that resource quantity,
their incomes, they must decide what to
resource quality, and technology are
purchase and what to forgo. Society
fifixed.
also faces an economizing problem.
10. An economy that is fully employed
Societal wants exceed the available
and thus operating on its production
resources necessary to fulfil them.
possibilities curve must sacrifice the
Society therefore must decide what to
output of some types of goods and
produce and what to forgo.
services to increase the production of
7. Graphically, a budget line (or budget
others. The gain of one type of good or
constraint) illustrates the economizing
service is always accompanied by an
problem for individuals. The line shows
opportunity cost in the form of the loss
the various combinations of two
of some of the other type.
products that a consumer can purchase
11. Because resources are not equally
with a specifific money income, given
productive in all possible uses, shifting
the prices of the two products.
resources from one use to another
8. Economic resources are inputs into
creates increasing opportunity costs.
the production process and can be
The production of additional units of one
classified as land, labor, capital, or
product requires the sacrififi ce of
entrepreneurial ability. Economic
increasing amounts of the other
resources are also known as factors of
product.
production or inputs.
12. The optimal (best) point on the
production possibilities curve represents
the most desirable mix of goods and is
determined by expanding the production
macroeconomics
of each good until its marginal benefits
aggregate
(MB) equals its marginal cost (MC).
positive economics
13. Over time, technological advances
normative economics
and increases in the quantity and quality
economizing problem
of resources enable the economy to
budget line
produce more of all goods and services,
economic resources
that is, to experience economic growth.
land
Society’s choice as to the mix of
labor
consumer goods and capital goods in
capital
current output is a major determinant of
investment
the future location of the production
entrepreneurial ability
possibilities curve and thus of the extent
factors of production
of economic growth.
consumer goods
14. International trade enables nations
capital goods
to obtain more goods from their limited
production possibilities curve
resources than their production
law of increasing opportunity costs
possibilities curve indicates.
economic growth
Terms and Concepts
economics
economic perspective
opportunity cost
utility
marginal analysis
scientifific method
economic principle
other-things-equal assumption
microeconomics