1

Limits, Alternatives, and Choices

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Introduction

Economics defined:

Economic wants exceed

productive capacity.

A social science concerned

with making optimal choices
under conditions of scarcity.

LO1

The Economic Perspective

Thinking like an economist

Key features:
Scarcity and choice
Purposeful behavior
Marginal analysis

LO1

Scarcity and Choice

Resources are scarce

Choices must be made
Opportunity cost
Theres no free lunch

LO1

Purposeful Behavior

Rational self-interest
Individuals and utility
Firms and profit
Desired outcomes

LO1

Marginal Analysis

Marginal benefit
Marginal cost
Marginal means extra
Comparison between marginal
benefit and marginal cost

LO1

Theories, Principles, and Models

The scientific method:

Observe

Formulate a hypothesis

Test the hypothesis

Accept, reject, or modify the hypothesis

Continue to test the hypothesis, if necessary

Economic principles

LO2

Generalizations
Other-things-equal assumption
Graphical expression

Microeconomics and Macroeconomics

Microeconomics

Decision making by individual

units

Macroeconomics
Aggregate

LO3

Positive and Normative Economics

Positive economics

Deals with economic facts

Normative economics

A subjective perspective of
the economy

LO3

Individuals 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

Individuals Economizing Problem

12

DVDs Books
$20
$10

10

6
5
4
3
2
1
0

0
2
4
6
8
10
12

Quantity of DVDs

$120 Budget

Income = $120
=6
Pdvd = $20

Unattainable
6
Income = $120
= 12
Pb = $10

4
2
0

Attainable

10

12

Quantity of Paperback Books

LO4

14

Global Perspective

LO4

Societys Economizing Problem

Scarce resources
Land
Labor
Capital
Entrepreneurial Ability

LO4

Societys Economizing Problem

Entrepreneurial ability
Takes initiative
Makes decisions
Innovates
Takes risk

LO4

Production Possibilities Model

Illustrates production choices

Assumptions:
Full employment
Fixed resources
Fixed technology
Two goods
LO5

Production Possibilities Table

Production Alternatives
Type of Product

Pizzas

10

(in hundred thousands)

Industrial Robots
(in thousands)

Plot the Points to Create the Graph

LO5

Industrial Robots

Production Possibilities Curve

14
13
12
11
10
9
8
7
6
5
4
3
2
1

A
B

Unattainable

Attainable
E
0

Pizzas

LO5

The law of
increasing
opportunity
costs makes
the PPC
concave.

8 9

Marginal Benefit & Marginal Cost

Optimal Allocation
MC
15

c
MB = MC

e
10

d
MB

0
1

LO5

2
Quantity of Pizza

A Growing Economy

Economic Growth

More resources
Improved resource quality
Technological advances

LO6

A Growing Economy

Production Alternatives
Type of Product

Pizzas

A'

B'

C'

D'

E'

14

12

(in hundred thousands)

Industrial Robots
(in thousands)

LO6

Industrial Robots

A Growing Economy
A

14
13
12
11
10
9
8
7
6
5
4
3
2
1

Unattainable

Economic
Growth

B
C

D
D

Now Attainable

Attainable

E
0

Pizzas
LO6

8 9

Future
Curve

Current
Curve

Goods for the Present

Presentville

LO6

Goods for the Future

Goods for the Future

Present Choices, Future Possibilities

Future
Curve
F

Current
Curve

Goods for the Present

Futureville

International Trade

Specialization
Increased production possibilities

LO6

Pitfalls to Sound Economic Reasoning

Biases
Loaded terminology
Fallacy of composition
Post hoc fallacy
Correlation not causation