PowerPoint Presentation by
Mehdi Arzandeh, University of Manitoba
Limits, Alternatives,
and Choices
1
LEARNING OBJECTIVES
LO1.1
LO1.2
LO1.3
LO1.4
LO1.5
LO1.6
LO1.7
LO1.8
List the ten key concepts to retain for a lifetime.
Define economics and the features of the economic way of thinking.
Describe the role of economic theory in economics.
Distinguish between microeconomics and macroeconomics, and between positive
economics and normative economics.
Explain the individual’s economic problem and how trade-offs, opportunity costs,
and attainable combinations can be illustrated with budget lines.
List the categories of scarce resources and delineate the economic problem.
Apply the concepts of production possibilities analysis, increasing opportunity costs,
and economic growth.
Explain how economic growth and international trade increase consumption
possibilities.
© 2016 McGraw‐Hill Education Limited
1-2
1.1
Ten Key Concepts to Retain
for a Lifetime
The Individual
1. Facing Trade-offs
2. Opportunity Costs
3. Choosing a Little More or Less
4. The Influence of Incentives
LO1
© 2016 McGraw‐Hill Education Limited
1-3
1.1
Ten Key Concepts to Retain
for a Lifetime
Interaction Among Individuals
5. Specialization and Trade
6. The Effectiveness of Markets
7. The Role of Governments
LO1
© 2016 McGraw‐Hill Education Limited
1-4
1.1
Ten Key Concepts to Retain
for a Lifetime
The Economy as a Whole and the Standard of Living
8. Production and the Standard of Living
9. Money & Inflation
10.Inflation-Unemployment Trade-off
LO1
© 2016 McGraw‐Hill Education Limited
1-5
1.2
The Economic Way of
Thinking
The Economy as a Whole and the Standard of Living
• Scarcity and Choice
• Scarcity of economic resources restricts options and
requires choices
• There’s no free lunch
• The opportunity cost of a choice is what forgone for that
choice
• Purposeful Behaviour
• Marginal Analysis: Comparing Benefits and Costs
LO2
© 2016 McGraw‐Hill Education Limited
1-6
1.3
Theories, Principles, and
Models
The scientific method
• Observing real-world behaviour and outcomes
• Formulating a hypothesis based of those observations
• Testing this hypothesis by comparing the actual outcomes
to the hypothesis predictions
• Accepting, rejecting, or modifying the hypothesis
• Continuing to test the hypothesis against the facts
LO3
© 2016 McGraw‐Hill Education Limited
1-7
1.3
Theories, Principles, and
Models
•Purposeful Simplifications
•Generalizations
•Other-Things-Equal Assumption (ceteris
paribus)
•Graphical Expression
LO3
© 2016 McGraw‐Hill Education Limited
1-8
1.4
Microeconomics and
Macroeconomics
• Microeconomics examines
• Individual units (household, firm or industry) and their
decision making process
• Macroeconomics examines
• The whole economy
• The subdivisions or aggregates
LO4
© 2016 McGraw‐Hill Education Limited
1-9
1.4
Microeconomics and
Macroeconomics
• Positive economics
• The analysis of facts to establish cause-and-effect
relationships.
• Normative economics
• The part of economics involving value judgments about
what the economy should be like.
LO4
© 2016 McGraw‐Hill Education Limited
1-10
1.5
The Individual’s Economic
Problem
Economic Problem
• Individuals need to make choices because economic
wants are unlimited but the means are limited.
Limited Income
• Income is finite even for the wealthiest
Unlimited Wants
• Wants are insatiable
• Wants change over time
LO5
© 2016 McGraw‐Hill Education Limited
1-11
1.1 GLOBAL PERSPECTIVE
Average Income, Selected Nations
LO5
© 2016 McGraw‐Hill Education Limited
1-12
1.5
The Individual’s Economic
Problem
The Budget Line
• ATTAINABLE AND UNATTAINABLE COMBINATIOS
• TRADE-OFFS AND OPPORTUNITY COSTS
• CHOICE
• INCOME CHANGES
LO5
© 2016 McGraw‐Hill Education Limited
1-13
FIGURE 1-1
A Consumer’s Budget Line
12
DVDs
$20
Books
$10
10
6
5
4
3
2
1
0
0
2
4
6
8
10
12
Quantity of DVDs
$120 Budget
Income = $120
Pdvd = $20
8
=6
Unattainable
6
Income = $120
Pb = $10
4
2
0
= 12
Attainable
2
4
6
8
10
12
14
Quantity of Paperback Books
LO5
© 2016 McGraw‐Hill Education Limited
1-14
1.6
Society’s Economic
Problem
Scarce Resources (factors of production)
• LAND
• LABOUR
• Human Capital
• CAPITAL
• Investment
• ENTREPRENEURIAL ABILITY
LO6
© 2016 McGraw‐Hill Education Limited
1-15
1.6
Society’s Economic
Problem
Entrepreneurs’ economic functions:
• takes initiative
• makes business decisions
• innovates
• bears risk
LO6
© 2016 McGraw‐Hill Education Limited
1-16
1.7
Production Possibilities
Model
• Illustrates production choices
• Assumptions:
• Full employment
• Fixed resources
• Fixed technology
• Two goods
• Consumer Goods
• Capital Goods
LO7
© 2016 McGraw‐Hill Education Limited
1-17
TABLE 1-1
Production Possibilities of Pizzas and Robots
with Full Employment and Productive Efficiency
Production Alternatives
Type of
Product
A
B
C
D
E
Pizzas (in
hundred
thousands)
0
1
2
3
4
Robots (in
thousands)
10
9
7
4
0
Plot the Points to Create the Graph…
LO7
© 2016 McGraw‐Hill Education Limited
1-18
FIGURE 1-2
KEY GRAPH - The Production Possibilities Curve
The law of
increasing
opportunity
costs makes
the PPC
concave.
A
10
B
9
Industrial Robots
Unattainable
C
7
W
D
4
Attainable
E
0
LO7
1
2
3
4
5
6
7
8
Pizzas
© 2016 McGraw‐Hill Education Limited
1-19
FIGURE 1-3
Optimal Allocation: MB = MC
Marginal Benefit & Marginal Cost
MC
15
c
MB = MC
e
10
5
b
0
LO7
a
d
MB
1
2
© 2016 McGraw‐Hill Education Limited
3 Quantity of Pizza
(hundred thousands
1-20
1.8
Unemployment, Growth,
and the Future
Unemployment
• The economy might not be operating at full
employment
• Points inside the production possibilities curve
• A move toward full employment yields a greater output
LO8
© 2016 McGraw‐Hill Education Limited
1-21
Unemployment, Productive Inefficiency, and the
Production Possibilities Curve
FIGURE 1-4
10
B
9
Industrial Robots
U, represents
unemployment or a
failure to achieve
productive
efficiency.
A
C
7
D
4
U
E
0
LO8
1
2
3
4
5
6
7
8
Pizzas
© 2016 McGraw‐Hill Education Limited
1-22
1.8
Unemployment, Growth,
and the Future
A Growing Economy
• INCREASES IN FACTOR SUPPLIES
• IMPROVED FACTOR QUALITY
• TECHNOLOGICAL ADVANCES
LO8
© 2016 McGraw‐Hill Education Limited
1-23
1.8
Unemployment, Growth,
and the Future
Economic Growth and the Production Possibilities Curve
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)
LO8
© 2016 McGraw‐Hill Education Limited
1-24
Economic Growth and the Production Possibilities
Curve
Industrial Robots
FIGURE 1-5
A’
14
13
12
11
10
9
8
7
6
5
4
3
2
1
B’
A
B
Economic
Growth
C’
C
D’
D
Now Attainable
Attainable
E’
E
0
LO8
Unattainable
1
2
3
4
5
6
7
8
© 2016 McGraw‐Hill Education Limited
Pizzas
1-25
KEY GRAPH – Present Choices and Future
Locations of a Production Possibilities Curve
Future
Curve
Current
Curve
Goods for the Future
Goods for the Future
FIGURE 1-6
P
Goods for the Present
Presentville
LO8
Future
Curve
F
Current
Curve
Goods for the Present
Futureville
© 2016 McGraw‐Hill Education Limited
1-26
1.8
Unemployment, Growth,
and the Future
A Qualification: International Trade
A nation is not necessarily limited to the
combinations of output indicated by its production
possibilities curve.
• International Specialization
• Production of items with lowest opportunity cost
• Trade
LO8
© 2016 McGraw‐Hill Education Limited
1-27
The LAST
WORD Pitfalls to Sound Economic Reasoning
• Biases
• Loaded Terminology
• Fallacy of Composition
• Post Hoc Fallacy
• Correlation and Causation
© 2016 McGraw‐Hill Education Limited
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Chapter Summary
LO1.1 List the ten key concepts to retain for a lifetime.
LO1.2 Define economics and the features of the economic way of thinking.
LO1.3 Describe the role of economic theory in economics.
LO1.4 Distinguish between microeconomics and macroeconomics, and
between positive economics and normative economics.
LO1.5 Explain the individual’s economic problem and how trade-offs,
opportunity costs, and attainable combinations can be illustrated
with budget lines.
LO1.6 List the categories of scarce resources and delineate the economic
problem.
LO1.7 Apply the concepts of production possibilities analysis, increasing
opportunity costs, and economic growth.
LO1.8 Explain how economic growth and international trade increase
consumption possibilities.
© 2016 McGraw‐Hill Education Limited
1-29