1

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

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

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

LO3

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

Positive and Normative Economics

Positive economics

Normative economics

LO3

Deals with economic facts

A subjective perspective of
the economy

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

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

Societys Economizing Problem

LO4

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

Production Possibilities Model

LO5

Illustrates production choices

Assumptions
Full employment
Fixed resources
Fixed technology
Two goods

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

Industrial Robots

Production Possibilities Model

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

A
B
C

Unattainable

Attainable
E
0

Pizzas
LO5

The law of
increasing
opportunity
costs makes
the PPC
concave.

Industrial Robots

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

A
B

Unattainable

A
B

C
C

Economic
Growth
D

Now Attainable

Attainable

E
0

Pizzas
LO6

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

Pitfalls to Sound Economic

Reasoning
Biases

Loaded terminology
Fallacy of composition
Post hoc fallacy
Correlation not causation