01

Limits, Alternatives, and

Choices

McGraw-Hill/Irwin

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

Introduction

LO1

Economics defined

A social science concerned

with making optimal choices
under conditions of scarcity

Economic wants exceed

productive capacity

1-2

The Economic Perspective

LO1

Scarcity and
Choice

Purposeful
Behavior

Marginal
Analysis

Resources
are scarce

Rational
Marginal
self-interest benefit

Choices must Individuals

be made
and utility

Marginal cost

Opportunity
cost

Firms and
profit

Marginal
means extra

Theres no
free lunch

Desired
outcomes

MB and MC

1-3

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

LO2

Economic principles
Generalizations
Other-things-equal assumption
Graphical expression
1-4

LO3

Microeconomics and
Macroeconomics
Microeconomics
Decision making by individual
units
Macroeconomics
Examines either the economy as
a whole or its basic subdivisions
or aggregates

1-5

Positive and Normative Economics

LO3

Positive economics
Deals with economic facts
Normative economics
A subjective perspective of the
economy

1-6

Individuals Economizing Problem

LO4

Limited income
Unlimited wants
A budget line
Attainable and unattainable options
Trade-offs and opportunity costs
Make the best choice possible
Change in income
1-7

Individuals Economizing Problem

12

DVDs Books
$20
$10

10

6
0
5
2
4
4
3
6
2
8
1 10
0 12

Quantity of DVDs

$120 Budget

Income = $120
=6
Pdvd = $20

Unattainable

Income = $120
= 12
Pb = $10

4
2
0

Attainable

10

12

Quantity of Paperback Books

LO4

14

1-8

Societys Economizing Problem

LO4

Scarce resources
Land
Labor
Capital
Entrepreneurial Ability (takes
initiatives, makes decisions,
innovates, and takes risks)

1-9

Production Possibilities Model

LO5

Illustrates production choices

Assumptions
Full employment
Fixed resources
Fixed technology
Two goods

1-10

Production Possibilities Model

Production Alternatives
Type of Product

Pizzas

10

(in hundred thousands)

Industrial Robots
(in thousands)

Plot the Points to Create the Graph

LO5

1-11

Industrial Robots

Production Possibilities Model

14
13
12
11
10 A B
9
8
C Unattainable
7
6
5
D
4
U
3
2 Attainable
1
E
0

The law of
increasing
opportunity
costs makes
the PPC
concave.
7

Pizzas
LO5

1-12

Industrial Robots

A Growing Economy
14 A
13
B
12
11
10 A
B
C
9
8
C
7
6
5
D
4
3
2 Attainable
1
E
0

Unattainable

Economic
Growth
D

Now Attainable
E
5

Pizzas
LO6

1-13

Present Choices, Future

Possibilities
Future
Curve

Current
Curve

Goods for the Present

Presentville
LO6

Goods for the Future

Goods for the Future

Compare Two Hypothetical Economies

Future
Curve
F

Current
Curve

Goods for the Present

Futureville
1-14

Pitfalls to Sound Economic

Reasoning
Biases

Loaded terminology
Fallacy of composition
Post hoc fallacy
Correlation not causation

1-15