Chapter Objectives
 Definition of Economics
 Role of economic theory
 Microeconomics vs. macroeconomics
 Resource scarcity and the economizing problem
 Production possibilities model
1-2

Economics Defined
 Economic Reality
 Human wants exceed productive capacity
 We don’t have the resources needed to produce what we want
 This is also known as scarcity of resource
1-3

Economics Defined
 Definition of Economics
 A discipline in social science concerned with making optimal choices under conditions of scarcity
1-4

The Economic Perspective
 Three features of economic perspective :
I.
Scarcity and choice
II. Purposeful behavior
III. Marginal analysis
1-5

I. Scarcity and Choice
 Resources are scarce
 This means we cannot have all we want
 We must make choices about:
 What we want
 What we are willing to give up.
 Scarcity forces us to make this choice
1-6

Opportunity Cost
 Because of scarcity, every choice involves a trade off
 This means:
 When we choose to get something
 We must give up something else
 What we must give up is also known as opportunity cost of the choice to get something
1-7

Example: Opportunity Cost
 What is the opportunity cost of coming to class today
 If you were to work for $10 an hour, the O.C. is
$10 x 1.42 hour = $14.20
 For Kobe Bryant, Drew Berrymore,
Jennifer Lopez and Bill gates, O.C. must have been much higher .
1-8

II. Purposeful Behavior
 Rational self-interest
 Human are rational and they behave to maximize self interest
 For example;
 Individuals tend to maximize their utility
(satisfaction).
 Firms tend to maximize their profits
 This simply means for every action there is a desired outcome in the mind of the actor.
 No action is completely random
1-9

III. Marginal Analysis
 Marginal benefit
 Benefit associated with one extra unit of output
 Marginal cost
 Cost associated with one extra unit of output
 Optimal decision compares marginal benefit with marginal cost
 Specifically, when MB=MC, output is optimal
1-10

Macro and Microeconomics
 Microeconomics
 Concerned with how an individual or a single firm makes decision.
 Individual analysis
 Macroeconomics
 Concerned with how an economy operates.
 Aggregate analysis

Macro and Microeconomics
 Positive Economics
 Described economic reality.
 Can be proved or disproved using economic data.
 Normative Economics
 Offers subjective judgments.
 Can not be disproved.

Individual’s Economizing Problem
 Assumptions:
 Limited income
 Fixed price
 Two goods
 A budget line
 Combination of two goods that can be purchased exhausting a fixed income.

Individual’s Economizing Problem
 A budget line
 Tradeoffs & opportunity costs
 Make best choice possible
 Change in income


$120 Budget
DVDs
$20
Books
$10
1
0
3
2
6
5
4
10
12
6
8
0
2
4
12
10
8
6
4
2
0
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
1-15

 Society’s Economizing Problem
 Scarce resources
 Land
 Labor
 Capital
 Entrepreneurial Ability
 Factors of production
1-16

 Production Possibilities Model
 Illustrate production choices
 Assumptions:
 Full employment
 Fixed resources
 Fixed technology
 Two goods
1-17

Production Possibilities Table
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 Points to Create Graph…
1-18

 Production Possibilities Curve
3
2
1
5
4
7
6
10
9
8
14
13
12
11
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
1-19

 Production Possibilities Curve
3
2
1
5
4
7
6
10
9
8
14
13
12
11
A’
A
B
B’
C
D
C’
Unattainable
Law of Increasing
Opportunity Cost
D’
Attainable
E
E’
0 1 2 3 4 5 6 7 8 9
Pizzas
Shape of the Curve
1-20

 Production Possibilities Curve
3
2
1
5
4
7
6
10
9
8
14
13
12
11
A’
U
B’
C’
Under or
Unemployment
D’
Unattainable
E’
0 1 2 3 4 5 6 7 8 9
Pizzas
1-21

 The Future Economy
 Consequences of unemployment
 Economic growth
 More resources
 Better quality resources
 Technological advances
1-22

 Future Possibilities
Future
Curve
Current
Curve
P
Goods for the Present
Presentville
F
Future
Curve
Current
Curve
Goods for the Present
Futureville
1-23

 International Trade
 Production point
 Consumption point
 Specialization
 Preview
1-24

 Optimal Allocation of
Resources c
MC
15 a
10
MB = MC e
5
0 b d
MB
1 2
Quantity of Pizza
3
1-25

LAST Word:
Pitfalls to Sound Economic Reasoning
 Biases
 Loaded terminology
 Fallacy of composition
 Post hoc fallacy
 Correlation but not causation
1-26

 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
1-27