01

Limits, Alternatives, and Choices

McGraw-Hill/I rwin
Copyright 2012 by The McGraw-Hill Companies, I nc. 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
Theres 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
Individuals 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
Individuals Economizing Problem
6
5
4
3
2
1
0
0
2
4
6
8
10
12
DVDs
$20
Books
$10
$120 Budget
12

10

8

6

4

2

0
2 4 6 8 10 12 14
Quantity of Paperback Books
Q
u
a
n
t
i
t
y

o
f

D
V
D
s

Income = $120
P
dvd
= $20
= 6
Income = $120
P
b
= $10
= 12
Attainable
Unattainable
LO4
1-8
Societys 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
The law of
increasing
opportunity
costs makes
the PPC
concave.
Production Possibilities Model
LO5
1-12
Pizzas
I
n
d
u
s
t
r
i
a
l

R
o
b
o
t
s

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
A Growing Economy
Pizzas
I
n
d
u
s
t
r
i
a
l

R
o
b
o
t
s

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
Economic
Growth
Now Attainable
A
B
C
D
E
LO6
1-13
Present Choices, Future Possibilities
Goods for the Present
G
o
o
d
s

f
o
r

t
h
e

F
u
t
u
r
e

G
o
o
d
s

f
o
r

t
h
e

F
u
t
u
r
e

Goods for the Present
P
F
Current
Curve
Current
Curve
Future
Curve
Future
Curve
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