Post on 22-Dec-2015
Limits, Alternatives, and Choices
Chapter 1
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
• Economics defined
• Role of economic theory
• Microeconomics vs. macroeconomics
• Resource scarcity and the economizing problem
• Production possibilities model1-2
Economics Defined
• Economic wants exceed productive capacity
• Social science concerned with making optimal choices under conditions of scarcity
1-3
The Economic Perspective
• Thinking like an economist
• Key features:–Scarcity and choice
–Purposeful behavior
–Marginal analysis
1-4
Scarcity and Choice
• Resources are scarce
• Choices must be made
• There is no free lunch
• Opportunity cost
1-5
Purposeful Behavior
• Rational self-interest
• Individuals and utility
• Firms and profit
• Desired outcomes
1-6
Marginal Analysis
• Marginal benefit
• Marginal cost
• Marginal means extra
• Comparison of marginal benefit and marginal cost
1-7
Economic Models
• The scientific method
• Cause and effect
• Economic principles
• Simplification of reality
• Other-things-equal assumption
• Graphical expression
1-8
Macro vs. Micro
• Macroeconomics–Aggregate
• Microeconomics–Individual Units
• Positive Economics
• Normative Economics
1-9
Individual’s Economizing Problem
• Limited income
• Unlimited wants
• A budget line
• Tradeoffs & opportunity costs
• Make best choice possible
• Change in income
1-10
A Budget Line
6543210
02468
1012
DVDs$20
Books$10
12
10
8
6
4
2
02 4 6 8 10 12 14
$120 Budget
Income = $120
Pdvd = $20= 6
Income = $120
Pb = $10= 12
Attainable
Unattainable
Quantity of Paperback Books
Qu
anti
ty o
f D
VD
s
1-11
Society’s Economizing Problem
• Scarce resources–Land–Labor–Capital–Entrepreneurial Ability
• Factors of production
1-12
Production Possibilities Model
• Illustrate production choices
• Assumptions:–Full employment
–Fixed resources
–Fixed technology
–Two goods
1-13
Type of Product
Pizzas (in hundred thousands)
Industrial Robots (in thousands)
Production Alternatives
A B C D E
10 9 7 4 0
0 1 2 3 4
Plot Points to Create Graph…
Production Possibilities Table
1-14
Production Possibilities Curve
Pizzas
Ind
ust
rial
Ro
bo
ts
Attainable
0 1 2 3 4 5 6 7 8 9
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
AB
C
D
E
EconomicGrowth
Now Attainable
A’
B’
C’
D’
E’
1-15
Production Possibilities Curve
Pizzas
Ind
ust
rial
Ro
bo
ts
Attainable
0 1 2 3 4 5 6 7 8 9
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
AB
C
D
E
Law of IncreasingOpportunity Cost
A’
B’
C’
D’
E’
Shape of the Curve
1-16
Production Possibilities Curve
Pizzas
Ind
ust
rial
Ro
bo
ts
Under or Unemployment
0 1 2 3 4 5 6 7 8 9
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A’
B’
C’
D’
E’
U
1-17
The Future Economy
• Consequences of unemployment
• Economic growth–More resources
–Better quality resources
–Technological advances
1-18
Future Possibilities
Goods for the Present
Goo
ds f
or t
he F
utur
e
Goo
ds f
or t
he F
utur
eGoods for the Present
P
F
CurrentCurve
CurrentCurve
FutureCurve
FutureCurve
Presentville Futureville
1-19
International Trade
• Production point
• Consumption point
• Specialization
• Preview
1-20
Optimal Allocation of Resources
15
10
5
0 1 2 3
a
b
c
d
e
MB = MC
MC
MB
Quantity of Pizza
Mar
gin
al B
enef
it &
Mar
gin
al C
ost
1-21
LAST Word: Pitfalls to Sound Economic Reasoning
• Biases
• Loaded terminology
• Fallacy of composition
• Post hoc fallacy• Correlation but not causation
1-22
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 1-23
The Market System and the Circular Flow
1-24