01Limits, Alternatives, and ChoicesMcGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

IntroductionEconomics definedEconomic wants exceed productive capacityA social science concerned with making optimal choices under conditions of scarcityLO11-*

EconomicsAn inquiry into the nature and causes of the wealth of nations. (Adam Smith)

Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man. (Alfred Marshall)

The Economic Perspective

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Scarcity and Choice Resources are scarceChoices must be madeOpportunity cost Theres no free lunch

Theories, Principles, and ModelsThe scientific methodEconomic principlesGeneralizationsOther-things-equal assumptionGraphical expressionObserveFormulate a hypothesisTest the hypothesisAccept, reject, or modify the hypothesisContinue to test the hypothesis, if necessaryLO21-*

Microeconomics and MacroeconomicsMicroeconomicsDecision making by individual units such as people, individuals business units.I.E Price of a specific ProductMacroeconomicsExamines either the economy as a whole or its basic subdivisions or aggregatesSuch as total output, total employement/unemployement, total expenditure.I.E Govt. decision makingLO31-*

Positive and Normative EconomicsPositive economicsDeals with economic facts, cause and effect relationship.Includes description theory, development and testing.Normative economicsA subjective perspective of the economyValue judgment of economy such as what particular policy action is recommended to achieve a desired goal.LO31-*

Individuals Economizing ProblemLimited incomeUnlimited wantsA budget lineAttainable and unattainable optionsTrade-offs and opportunity costsMake the best choice possibleChange in incomeLO41-*

Individuals Economizing ProblemLO41-*

Societys Economizing ProblemResources are always SCARCEScarce resourcesLand (All natural resources used in production process.)Labor (Physical and mental talent used in production process)

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Societys Economizing Problem Cont.Capital (All manufactured aid used in production process such as storage, transpiration)Entrepreneurial Ability(They are distinct from labor. Combine resources from Land, Labor, and Capital to produce goods)Takes initiatives, makes decisions, innovates, and takes risks)

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Production Possibilities ModelIllustrates production choicesAssumptionsFull employmentFixed resourcesFixed technologyTwo goodsLO51-*

Type of ProductPizzas (in hundred thousands)Industrial Robots (in thousands)Production AlternativesABCDE10974001234Plot the Points to Create the GraphProduction Possibilities ModelLO51-*

PizzasIndustrial RobotsAttainable0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1UnattainableABCDEThe law of increasing opportunity costs makes the PPC concave.Production Possibilities ModelLO51-*

A Growing EconomyPizzasIndustrial RobotsAttainable0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1UnattainableABCDEEconomicGrowthNow AttainableABCDELO61-*

The End1-*

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