Chapter 1
Limits, Alternatives, and
Choices
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Economics
• A social science concerned with making
optimal choices under conditions of
scarcity
• Economic wants exceed society’s
productive capacity
LO1
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1-2
The Economic Perspective
• Scarcity and choice
• Opportunity cost
• Purposeful behavior to increase utility
• Marginal analysis
LO1
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1-3
Scarcity and Choice
• Resources are scarce
• Choices must be made
• Opportunity cost
• There is no free lunch
LO1
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1-4
Purposeful Behavior
• Rational self-interest
• Individuals and utility
• Firms and profit
• Desired outcome
LO1
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1-5
Marginal Analysis
• Marginal benefit
• Marginal cost
• Marginal means “extra”
• Comparison between marginal benefit and
marginal cost
LO1
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1-6
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
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1-7
Economic Principles
• Generalizations
• Other-things-equal assumption
• Ceteris paribus
• Graphical expression
LO2
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1-8
Micro and Macro
• Microeconomics
• The study of the individual consumer,
firm, or market
• Macroeconomics
• The study of the entire economy or a
major aggregate of the economy
LO3
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1-9
Positive and Normative
Economics
• Positive economics
• Economic statements that are factual
• Normative economics
• Economic statements that involve value
judgments
LO3
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1-10
The Economizing Problem
• The economizing problem
• Limited income and unlimited wants
• The budget line
• Attainable and unattainable combinations
• Trade-offs and opportunity costs
LO4
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1-11
The Consumer’s Budget Line
12
The Budget Line: Combinations of
Movies and Books Attainable with $120
Units of
Movies
(Price = $20)
Units of
Books
(Price=$10)
Total
Expenditure
6
0
$120
5
2
$120
4
4
$120
LO4
3
6
$120
2
8
$120
1
10
$120
0
12
$120
10
Income = $120
Pm = $20
8
=6
Unattainable
6
Income = $120
Pb = $10
4
2
0
= 12
Attainable
2
4
6
8
10
12
14
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1-12
Global Perspective
LO4
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1-13
Society’s Economizing
Problem
• 4 categories of economic resources
• Land
• Labor
• Capital
• Investment
• Entrepreneurial ability
LO5
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1-14
Society’s Economizing
Problem Continued
• Entrepreneurs
• Employ the other factors of production
• Take initiative
• Make strategic business decisions
• Innovate
• Take risk
LO5
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1-15
Production Possibilities Model
• Economic model that shows different
combinations of two goods that an
economy can produce
• Full employment
• Fixed resources
• Fixed technology
• 2-good economy
• Consumer goods and capital goods
LO6
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1-16
Production Possibilities Model
Continued
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 the points to create the graph…
LO6
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1-17
Production Possibilities Graph
Industrial robots
Q
14
13
12
11
10
9
8
7
6
5
4
3
2
1
A
Unattainable
B
W
C
D
Attainable
E
0 1 2 3 4 5 6 7 8 9
Q
Pizzas
LO6
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1-18
Increasing Opportunity Costs
• Law of increasing opportunity costs
• As more of a particular good is
produced, its marginal opportunity costs
increase
• Production possibilities curve
• Concave shape
• Economic rationale
LO6
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1-19
Optimal Output
Marginal benefit & marginal cost
15
MC
a
c
MB = MC
e
10
5
b
d
MB
0
1
LO6
2
Quantity of pizza
3
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1-20
A Growing Economy
Production Alternatives
Type of Product
Pizzas
A'
B'
C'
D'
E'
0
2
4
6
8
14
12
9
5
0
(in hundred thousands)
Industrial Robots
(in thousands)
LO7
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1-21
Unemployment, Growth, and
the Future
Industrial robots
• Economic growth
LO7
14 A’
13
B’
12
11
10 A
C
B
9
’
8
C
7
6
5
D
4
3
2
Attainable
1
E
Unattainable
D’
Now attainable
E’
0 1 2 3 4 5 6 7 8 9
Pizzas
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1-22
Future
Curve
Current
curve
P
Goods for the present
Presentville
LO7
Goods for the future
Goods for the future
Present Choices, Future
Possibilities
Future
Curve
F
Current
curve
Goods for the present
Futureville
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1-23
International Trade
• Specialization
• Increased production possibilities
LO7
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1-24
Pitfalls to Sound Economic
Reasoning
• Biases
• Loaded terminology
• Fallacy of composition
• Post hoc fallacy
• Correlation not causation
1-25
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