Chapter 01: Limits, Alternatives, and Choices

01Limits, Alternatives, and ChoicesMcGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.IntroductionEconomics definedEconomic wants exceed productive capacityA social science concerned with making optimal choices under conditions of scarcityLO11-*The Economic Perspective Scarcity and ChoicePurposeful BehaviorMarginal Analysis Resources are scarceRational self-interestMarginal benefitChoices must be made Individuals and utilityMarginal costOpportunity cost Firms and profitMarginal means extra There’s no free lunch Desired outcomesMB and MCLO11-*Theories, Principles, and ModelsThe scientific methodEconomic principlesGeneralizationsOther-things-equal assumptionGraphical expressionObserveFormulate a hypothesisTest the hypothesisAccept, reject, or modify the hypothesisContinue to test the hypothesis, if necessaryLO21-*Microeconomics and MacroeconomicsMicroeconomicsDecision making by individual unitsMacroeconomicsExamines either the economy as a whole or its basic subdivisions or aggregatesLO31-*Positive and Normative EconomicsPositive economicsDeals with economic factsNormative economicsA subjective perspective of the economyLO31-*Individual’s Economizing ProblemLimited incomeUnlimited wantsA budget lineAttainable and unattainable optionsTrade-offs and opportunity costsMake the best choice possibleChange in incomeLO41-*Individual’s Economizing Problem6543210024681012DVDs$20Books$10$120 Budget1210 8 6 4 2 02 4 6 8 10 12 14Quantity of Paperback BooksQuantity of DVDsIncome = $120Pdvd = $20= 6Income = $120Pb = $10= 12AttainableUnattainableLO41-*Society’s Economizing ProblemScarce resourcesLandLaborCapitalEntrepreneurial Ability (takes initiatives, makes decisions, innovates, and takes risks)LO41-*Production Possibilities ModelIllustrates production choicesAssumptionsFull employmentFixed resourcesFixed technologyTwo goodsLO51-*Type of ProductPizzas (in hundred thousands)Industrial Robots (in thousands)Production AlternativesABCDE10974001234Plot the Points to Create the GraphProduction Possibilities ModelLO51-*The law of increasing opportunity costs makes the PPC concave.Production Possibilities ModelLO51-*PizzasIndustrial RobotsAttainable0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1UnattainableABCDEUA Growing EconomyPizzasIndustrial RobotsAttainable0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1UnattainableABCDEEconomicGrowthNow AttainableA’B’C’D’E’LO61-*Present Choices, Future PossibilitiesGoods for the PresentGoods for the FutureGoods for the FutureGoods for the PresentPFCurrentCurveCurrentCurveFutureCurveFutureCurvePresentvilleFuturevilleCompare Two Hypothetical EconomiesLO61-*Pitfalls to Sound Economic ReasoningBiasesLoaded terminologyFallacy of compositionPost hoc fallacyCorrelation not causation1-*