Macro Ch 1 - 19e - use this one
01
Limits, Alternatives, and Choices
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
LO1
Introduction
•
Economics defined:
•
Economic wants exceed productive capacity.
•
A social science concerned with making optimal choices under conditions of scarcity.
1-2
LO1
The Economic Perspective
•
Thinking like an economist
•
Key features:
•
Scarcity and choice
•
Purposeful behavior
•
Marginal analysis
1-3
LO1
Scarcity and Choice
•
Resources are scarce
•
Choices must be made
•
Opportunity cost
• There’s no free lunch
1-4
LO1
Purposeful Behavior
•
Rational self-interest
•
Individuals and utility
•
Firms and profit
•
Desired outcomes
1-5
LO1
Marginal Analysis
•
Marginal benefit
•
Marginal cost
•
Marginal means change or
“extra”
•
Comparison between marginal benefit and marginal cost
1-6
LO2
Theories, Principles, and Models
•
The scientific method:
Observe Formulate a hypothesis
Accept, reject, or modify the hypothesis
Continue to test the hypothesis, if necessary
Test the hypothesis
•
Economic principles
•
Generalizations
•
Other-things-equal assumption
•
Graphical expression
1-7
LO3
Microeconomics and Macroeconomics
•
Microeconomics
•
Decision making by individual units
•
Macroeconomics
•
Aggregate
1-8
LO3
Positive and Normative Economics
•
Positive economics
•
Deals with economic facts
•
Normative economics
•
A subjective perspective of the economy
1-9
Individual’s Economizing Problem
•
Limited income
•
Unlimited wants
•
A budget line
•
Attainable and unattainable options
•
Tradeoffs and opportunity costs
•
Make the best choice possible
LO4
•
Change in income
1-10
LO4
Individual’s Economizing Problem
$120 Budget
DVDs
$20
Books
$10
1
0
3
2
6
5
4
10
12
6
8
0
2
4
4
2
0
12
10
8
6
Income = $120
P dvd
= $20
= 6
Attainable
Unattainable
Income = $120
P b
= $10
= 12
2 4 6 8 10 12 14
Quantity of Paperback Books
1-11
LO4
Global Perspective
1-12
Almost half the world — over three billion people
— live on less than $2.50 a day.
LO4
Society’s Economizing Problem
•
Scarce resources (Factors of
Production)
•
Land
•
Labor
•
Capital
•
Entrepreneurial Ability
1-14
LO4
Society’s Economizing Problem
•
Entrepreneurial ability
•
Takes initiative
•
Makes decisions
•
Innovates
•
Takes risk
1-15
End Show
1-16
The Market System
Five Fundamental Questions
•
Who Will Get the
Output?
•
How Will the System
Accommodate Change?
•
How Will the System
Promote Progress?
–
Technological Advance
–
Creative Destruction
–
Capital Accumulation
Copyright 2008 The McGraw-Hill Companies
The Market System
The “Invisible Hand”
End Show
1-17
•
1776 Wealth of Nations by Adam Smith
–
Efficiency
–
Incentives
–
Freedom
Copyright 2008 The McGraw-Hill Companies
The Market System
Demise of Command Systems
End Show
1-18
USSR East Germany
Yugoslavia
•
Two Insurmountable
Problems
–
The Coordination
Problem
–
The Incentive Problem
Copyright 2008 The McGraw-Hill Companies
End Show
•
Economic Efficiency
• Allocative Efficiency – Producing what society wants
Marginal Benefit = Marginal Cost
Productive Efficiency lowest cost
– Producing at
Lowest Average Total Cost
1-19
Copyright 2008 The McGraw-Hill Companies
LO5
Production Possibilities Model
•
Illustrates production choices
•
Assumptions:
•
Full employment
•
Fixed resources
•
Fixed technology
•
Two goods
1-20
Production Possibilities Table
LO5
Type of Product
Pizzas
(in hundred thousands)
Industrial Robots
(in thousands)
Production Alternatives
A
0
B
1
C
2
D
3
E
4
10 9 7 4 0
Plot the Points to Create the Graph…
1-21
LO5
Production Possibilities Curve
2
1
4
3
6
5
8
7
11
10
9
14
13
12
A
U
B
C
Attainable
D
Unattainable
E
0 1 2 3 4 5 6 7 8 9
Pizzas
The law of increasing opportunity costs makes the PPC concave.
1-22
LO5
5
0
15
Optimal Allocation a
MB = MC e c
MC
10 b
1 2
Quantity of Pizza d
3
MB
1-23
LO6
A Growing Economy
•
Economic Growth
•
More resources
•
Improved resource quality
•
Technological advances
1-24
LO6
A Growing Economy
Type of Product
Pizzas
(in hundred thousands)
Industrial Robots
(in thousands)
Production Alternatives
A' B' C' D' E'
0 2 4 6 8
14 12 9 5 0
1-25
LO6
A Growing Economy
2
1
4
3
7
6
5
11
10
9
8
14
13
12
A’
A
B
B’
C
D
C’
Economic
Growth
D’
Unattainable
Now Attainable
Attainable
E
E’
0 1 2 3 4 5 6 7 8 9
Pizzas
1-26
Present Choices, Future Possibilities
LO6
Future
Curve
Current
Curve
P
Goods for the Present
Presentville
F
Future
Curve
Current
Curve
Goods for the Present
Futureville
1-27
LO6
International Trade
•
Specialization
•
Increased production possibilities
1-28
Pitfalls to Sound Economic Reasoning
•
Biases
•
Loaded terminology
•
Fallacy of composition
•
Post hoc fallacy
•
Correlation not causation
1-29
Key Terms
• other-things-equal assumption
• production possibilities curve
• law of increasing opportunity costs
End Show
1-30
Copyright 2008 The McGraw-Hill Companies
