Chapter 1
Limits, Alternatives & Choices
By Dr. Laura Lamb & material from McConnell, Brue, Flynn &
Barbiero
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The social science concerned with how
individuals, institutions, and society make
best choices under conditions of scarcity.
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The economic way of thinking (aka economic
perspective) consists of numerous elements:
a) Scarcity & choice
b) Purposeful behaviour
c) Marginal Analysis
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What is scarce?
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What are resources?
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The concept of opportunity cost: the next
best alternative foregone.
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The concept of opportunity cost: the next
best alternative foregone.
What is the opportunity cost of attending this
class today?
Illustrates that there is no free lunch!
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Rational self-interest entails making
decisions to achieve maximum satisfaction
i.e. the economic concept of utility.
Different preferences and circumstances lead
to different choices.
Rational self-interest is not the same as
selfishness.
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the comparison of marginal benefits and
marginal costs, usually for decision making.
Most decisions are made on the margin.
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Economics uses scientific method
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Observe real world behaviour & outcomes
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Based on observations, formulate a hypothesis
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Test the hypothesis
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Accept, reject, or modify the hypothesis based on
testing
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Continue to test against facts
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If hypothesis is supported in many trials, the theory
becomes an economic principle or economic law.
These economic principles are incorporated into
models
Economic theories are developed to explain
the behaviour of economic agents
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1.
2.
3.
Generalizations
Other-things-equal assumption (aka ceteris
paribus)
Graphical expression
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Microeconomics looks at specific economic
units
Macroeconomics examines the economy as a
whole
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Positive economics describes the economy as
it actually is.
Normative economics involves value
judgments about what the economy should
be like and the desirability of the policy
options available.
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1.
2.
3.
4.
5.
The total revenue of Ford Motor Company
have risen over the past 2 years.
The unemployment rate remains high at the
end of 2012.
The price of gasoline continues to be
volatile.
Sears is closing several store locations in
2012.
Inflation rates are relatively low.
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1.
2.
3.
4.
The unemployment rate is 7.2%.
The provincial governments should spend
more on health care.
The unemployment rate remains lowest in
Alberta.
The price of asparagus is too high.
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The need to make choices because society’s
material wants for goods and services are
unlimited but the resources available to
satisfy these wants are scarce.
The economic problem is experienced by
individuals & society as a whole.
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Individuals are confronted with the need to
make choices because their wants exceed
their means to satisfy them.
Limited income – everyone, even the most
wealthy, has a finite amount of money to
spend.
Unlimited wants – people’s wants are virtually
unlimited.
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The combination of limited income and
unlimited wants force us to choose those
goods and services that will maximize our
utility.
A budget line is used to illustrate the
individual economic problem.
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A schedule or curve that shows the various
combinations of two products a consumer
can purchase with a specific money income.
Used to identify attainable & unattainable
bundles of products.
The budget line can change. When?
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Scarce resources
Resource categories: land, labour, capital, &
entrepreneurial ability
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Assumptions of the model:
1. Economy is employing all available resources.
2. Available supply of resources is fixed in
quantity and quality at this point in time.
3. Technology is constant during analysis.
4. Economy produces only two types of products.
Choices will be necessary because resources and
technology are fixed. A production possibilities
table illustrates some of the possible choices.
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Production Alternatives
Product
A
B
C
D
E
Butter
0
1
2
3
4
Guns
10
9
7
4
q
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The PPC illustrates increasing opportunity
costs
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1.
2.
3.
4.
What is the total opportunity cost of
producing 3 units of butter?
When at Production alternative B, what is
the opportunity cost of producing 1 more
unit of butter?
Is the production of 3 units of butter & 3
units of guns attainable?
Is the production of 3 units of butter & 7
units of guns attainable?
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What is the economic rationale for
increasing opportunity costs?
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How does society decide its optimal point on
the production possibilities curve?
Use marginal analysis
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Other uses of the PPC
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1.
Biases
2.
Loaded terminology
3.
Fallacy of composition
4.
Causation fallacies
◦ Post hoc fallacy
◦ Correlation versus causation
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The textbook website offers many practice
questions to test your understanding of the
economic concepts.
Also, do the appendix study questions of
graphing.
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