01

Limits, Alternatives, and

Choices

McGraw-Hill/Irwin

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

Introduction

LO1

Economics defined:

Economic wants exceed

productive capacity.

A social science concerned

with making optimal choices
under conditions of scarcity.

1-2

The Economic Perspective

Thinking like an economist

Key features:

LO1

Scarcity and choice

Purposeful behavior
Marginal analysis

1-3

Scarcity and Choice

Resources are scarce

Choices must be made
Opportunity cost

LO1

Theres no free lunch

1-4

Purposeful Behavior

LO1

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

1-5

Marginal Analysis

LO1

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

1-6

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
1-7

Microeconomics and
Macroeconomics
Microeconomics

Macroeconomics

LO3

Decision making by individual

units

Aggregate

1-8

Positive and Normative Economics

Positive economics

Normative economics

LO3

Deals with economic facts

A subjective perspective of
the economy

1-9

Individuals Economizing Problem

Limited income
Unlimited wants
A budget line

LO4

Attainable and unattainable options

Tradeoffs and opportunity costs
Make the best choice possible

Change in income
1-10

Individuals Economizing Problem

$120 Budget

12

DVDs Books
$20
$10

10

0
2
4
6
8
10
12

Income = $120
Quantity of DVDs

6
5
4
3
2
1
0

Pdvd = $20

Unattainable

Income = $120
= 12
Pb = $10

4
2
0

=6

Attainable

10

12

Quantity of Paperback Books

LO4

14
1-11

Global Perspective

LO4

1-12

Societys Economizing Problem

Scarce resources

LO4

Land
Labor
Capital
Entrepreneurial Ability

1-13

Societys Economizing Problem

Entrepreneurial ability

LO4

Takes initiative
Makes decisions
Innovates
Takes risk

1-14

Production Possibilities Model

Illustrates production choices

Assumptions:

LO5

Full employment
Fixed resources
Fixed technology
Two goods
1-15

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

1-16

Industrial Robots

Production Possibilities Curve

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

The law of
increasing
opportunity
costs makes
the PPC
concave.

A
B

Unattainable

Attainable
E
0

8 9

Pizzas
LO5

1-17

Marginal Benefit & Marginal Cost

Optimal Allocation
MC
15

c
MB = MC

e
10

LO5

d
MB

2
Quantity of Pizza

1-18

A Growing Economy

Economic Growth

LO6

More resources
Improved resource quality
Technological advances

1-19

A Growing Economy
Production Alternatives
Type of Product

Pizzas

A'

B'

C'

D'

E'

14

12

(in hundred thousands)

Industrial Robots
(in thousands)

LO6

1-20

Industrial Robots

A Growing Economy
A

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

Unattainable

A
B

Economic
Growth

C
C

D
D

Now Attainable

Attainable

E
0

8 9

Pizzas
LO6

1-21

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
1-22

International Trade

LO6

Specialization
Increased production possibilities

1-23

Pitfalls to Sound Economic

Reasoning
Biases

Loaded terminology
Fallacy of composition
Post hoc fallacy
Correlation not causation

1-24