01

Limits, Alternatives, and Choices

McGraw-Hill/IrwinCopyright © 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 1-2

The Economic Perspective

Scarcity and

Choice

Purposeful

Behavior

Marginal

Analysis

• Resources

are scarce

• Rational

self-interest

• Marginal

benefit

• Choices must

be made

• Individuals

and utility

• Marginal cost

• Opportunity

cost

• Firms and

profit

• Marginal

means extra

• There’s no

free lunch

• Desired

outcomes

• MB and MC

LO1 1-3

Theories, Principles, and Models

• The scientific method

• Economic principles

• Generalizations

• Other-things-equal assumption

• Graphical expression

Observe Formulate a hypothesis Test the hypothesis

Accept, reject, or modify the hypothesis

Continue to test the hypothesis, if necessary

LO2 1-4

Microeconomics and Macroeconomics

• Microeconomics

• Decision making by individual

units

• Macroeconomics

• Examines either the economy

as a whole or its basic

subdivisions or aggregates

LO3 1-5

Positive and Normative Economics

• Positive economics

• Deals with economic facts

• Normative economics

• A subjective perspective of

the economy

LO3 1-6

Individual’s Economizing Problem

• Limited income

• Unlimited wants

• A budget line

• Attainable and unattainable

options

• Trade-offs and opportunity costs

• Make the best choice possible

• Change in income

LO4 1-7

Individual’s Economizing Problem

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DVDs$20

Books$10

$120 Budget 12

10

8

6

4

2

02 4 6 8 10 12 14Quantity of Paperback Books

Qu

anti

ty o

f D

VD

s

Income = $120

Pdvd = $20= 6

Income = $120

Pb = $10= 12

Attainable

Unattainable

LO4 1-8

Society’s Economizing Problem

• Scarce resources

• Land

• Labor

• Capital

• Entrepreneurial Ability (takes

initiatives, makes decisions,

innovates, and takes risks)

LO4 1-9

Production Possibilities Model

• Illustrates production choices

• Assumptions

• Full employment

• Fixed resources

• Fixed technology

• Two goods

LO5 1-10

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 the Points to Create the Graph…

Production Possibilities Model

LO5 1-11

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

A

B

C

D

E

U

The law of

increasing

opportunity

costs makes

the PPC

concave.

Production Possibilities Model

LO5 1-12

A Growing Economy

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

A

B

C

D

E

EconomicGrowth

Now Attainable

A’

B’

C’

D’

E’

LO6 1-13

Present Choices, Future Possibilities

Goods for the Present

Go

od

s fo

r th

e Fu

ture

Go

od

s fo

r th

e F

utu

re

Goods for the Present

P

F

CurrentCurve

CurrentCurve

FutureCurve

FutureCurve

Presentville Futureville

Compare Two Hypothetical Economies

LO6 1-14

Pitfalls to Sound Economic Reasoning

• Biases

• Loaded terminology

• Fallacy of composition

• Post hoc fallacy

• Correlation not causation

1-15