Chapter 1: Limits, Alternatives, and Choices

Chapter 1Limits, Alternatives, and ChoicesCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinLO1IntroductionEconomics defined:Economic wants exceed productive capacity.A social science concerned with making optimal choices under conditions of scarcity.1-*LO1The Economic PerspectiveThinking like an economistKey features:Scarcity and choicePurposeful behaviorMarginal analysis1-*LO1Scarcity and ChoiceResources are scarceChoices must be madeOpportunity costThere’s no free lunch1-*LO1Purposeful BehaviorRational self-interestIndividuals and utilityFirms and profitDesired outcomes1-*LO1Marginal AnalysisMarginal benefitMarginal costMarginal means “extra”Comparison between marginal benefit and marginal cost1-*LO2Theories, Principles, and ModelsThe scientific method:Economic principlesGeneralizationsOther-things-equal assumptionGraphical expressionObserveFormulate a hypothesisTest the hypothesisAccept, reject, or modify the hypothesisContinue to test the hypothesis, if necessary1-*LO3Microeconomics and MacroeconomicsMicroeconomicsDecision making by individual unitsMacroeconomicsAggregate1-*LO4Individual’s Economic ProblemLimited incomeUnlimited wantsA budget lineAttainable and unattainable optionsTrade-offs and opportunity costsMake the best choice possibleChange in income1-*LO4Individual’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= 12AttainableUnattainable1-*LO4Global SnapshotAverage Income, Selected Nations1-*LO4Society’s Economic ProblemScarce resourcesLandLaborCapitalEntrepreneurial ability1-*LO4Society’s Economizing ProblemEntrepreneurial abilityTakes initiativeMakes decisionsInnovatesTakes risk1-*LO5Production Possibilities ModelIllustrates production choicesAssumptions:Full employmentFixed resourcesFixed technologyTwo goods1-*LO5Production Possibilities TableType of ProductPizzas (in hundred thousands)Industrial Robots (in thousands)Production AlternativesABCDE10974001234Plot the Points to Create the Graph1-*LO5Production Possibilities CurvePizzasIndustrial RobotsAttainable0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1UnattainableABCDEThe law of increasing opportunity costs makes the PPC concave.1-*Law of Increasing Opportunity CostsAs production of a good increases, the opportunity cost of producing an additional unit rises.LO51-*Optimal AllocationLO5abcdeMB = MCMCMB1510 5 01 2 3Quantity of PizzaMarginal Benefit & Marginal Cost1-*Unemployment, Growth, and the FutureUnemployment limits how much can be producedProduction will be at a point inside the PPCMoving toward full employment will increase output1-*LO6A Growing Economy Economic growthMore resourcesImproved resource qualityTechnological advances1-*Type of ProductFood products (hundred thousands)Manufacturing equipment (thousands)Production AlternativesA'B'C'D'E'141295002468A Growing EconomyLO61-*LO6A Growing EconomyFood Products (hundred thousands)Manufacturing Equipment (thousands)0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1ABCDEA'B'C'D'E'1-*LO6Present Choices, Future PossibilitiesGoods for the PresentGoods for the FutureGoods for the FutureGoods for the PresentPFCurrentCurveCurrentCurveFutureCurveFutureCurvePresentvilleFutureville1-*