01
Limits, Alternatives, and Choices
Introduction
• Economics defined:
• Economic wants exceed
productive capacity.
• A social science concerned
with making optimal choices
under conditions of scarcity.
1-2
LO1
The Economic Perspective
• Thinking like an economist
• Key features:
• Scarcity and choice
• Purposeful behavior
• Marginal analysis
LO1
1-3
Scarcity and Choice
• Resources are scarce
• Choices must be made
• Opportunity cost
• There’s no free lunch
1-4
LO1
Purposeful Behavior
•
•
•
•
Rational self-interest
Individuals and utility
Firms and profit
Desired outcomes
1-5
LO1
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:
Formulate a hypothesis
Observe
Test the hypothesis
Accept, reject, or modify the hypothesis
Continue to test the hypothesis, if necessary
•
Economic principles
•
•
•
Generalizations
Other-things-equal assumption
Graphical expression
1-7
LO2
Microeconomics and Macroeconomics
• Microeconomics
• Decision making by individual
units
• Macroeconomics
• Aggregate
1-8
LO3
Positive and Normative Economics
• Positive economics
• Deals with economic facts
• Normative economics
• A subjective perspective of
the economy
LO3
1-9
Individual’s Economizing Problem
• Limited income
• Unlimited wants
• A budget line
• Attainable and unattainable options
• Tradeoffs and opportunity costs
• Make the best choice possible
• Change in income
1-10
LO4
Individual’s Economizing Problem
DVDs Books
$20
$10
6
5
4
3
2
1
0
0
2
4
6
8
10
12
12
10
Income = $120
Quantity of DVDs
$120 Budget
Pdvd = $20
8
=6
Unattainable
6
Income = $120
4
2
0
Pb = $10
= 12
Attainable
2
4
6
8
10
12
Quantity of Paperback Books
14
1-11
LO4
Global Perspective
LO4
1-12
Society’s Economizing Problem
• Scarce resources
• Land
• Labor
• Capital
• Entrepreneurial Ability
1-13
LO4
Society’s Economizing Problem
• Entrepreneurial ability
• Takes initiative
• Makes decisions
• Innovates
• Takes risk
1-14
LO4
Production Possibilities Model
• Illustrates production choices
• Assumptions:
• Full employment
• Fixed resources
• Fixed technology
• Two goods
LO5
1-15
Production Possibilities Table
Production Alternatives
Type of Product
A
B
C
D
E
0
1
2
3
4
10
9
7
4
0
Pizzas
(in hundred thousands)
Industrial Robots
(in thousands)
Plot the Points to Create the Graph…
1-16
LO5
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
C
D
U
Attainable
E
0
1
2
3
4
5
6
7
8 9
Pizzas
1-17
LO5
Marginal Benefit & Marginal Cost
Optimal Allocation
MC
15
c
MB = MC
e
10
5
b
0
LO5
a
d
MB
1
2
Quantity of Pizza
3
1-18
A Growing Economy
• Economic Growth
• More resources
• Improved resource quality
• Technological advances
1-19
LO6
A Growing Economy
Production Alternatives
Type of Product
A'
B'
C'
D'
E'
0
2
4
6
8
14
12
9
5
0
Pizzas
(in hundred thousands)
Industrial Robots
(in thousands)
1-20
LO6
Industrial Robots
A Growing Economy
A’
14
13
12
11
10
9
8
7
6
5
4
3
2
1
B’
Unattainable
A
B
Economic
Growth
C’
C
D’
D
Now Attainable
Attainable
E’
E
0
1
2
3
4
5
6
7
8 9
Pizzas
LO6
1-21
Future
Curve
Current
Curve
P
Goods for the Future
Goods for the Future
Present Choices, Future Possibilities
Goods for the Present
Presentville
Future
Curve
F
Current
Curve
Goods for the Present
Futureville
1-22
LO6
International Trade
• Specialization
• Increased production possibilities
1-23
LO6
Pitfalls to Sound Economic Reasoning
•
•
•
•
•
Biases
Loaded terminology
Fallacy of composition
Post hoc fallacy
Correlation not causation
1-24