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

Thinking like an economist

Key features:

Scarcity and choice

Marginal analysis

Rational self-interest(max.
satisfaction)

Scarcity and Choice

Resources are scarce

Choices must be made
Opportunity cost

LO1

Theres no free lunch

Purposeful Behavior

LO1

Rational self-interest
Individuals and utility
Firms and profit
Desired(preferred) outcomes

Marginal Analysis

LO1

Marginal benefit
Marginal cost
Marginal means extra
Comparison between marginal
benefit and marginal cost

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

Graphical expression

All other things held constant (otherthings-equal) assumption

Microeconomics and
Macroeconomics
Microeconomics

Macroeconomics

LO3

Decision making by individual

units
Aggregate

Positive and Normative Economics

Positive economics

Normative economics

LO3

Deals with economic facts

A subjective perspective of
the economy

Individuals Economizing Problem

Limited income
Unlimited wants
A budget line

LO4

Attainable and unattainable options

Tradeoffs and opportunity costs
Make the best choice possible

Change in income

Individuals Economizing Problem

12

DVDs Books
$20
$10

10

60
52
44
36
28
110
012

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

Global Perspective

LO4

Societys Economizing Problem

Scarce resources

LO4

Land
Labor
Capital
Entrepreneurial Ability

Societys Economizing Problem

Entrepreneurial ability

LO4

Takes initiative
Makes decisions
Innovates
Takes risk

Production Possibilities Model

Illustrates production choices

Assumptions:

LO5

Full employment
Fixed resources
Fixed technology
Two goods

Production Possibilities Table

Production Alternatives
Type of Product

Pizzas
(in hundred thousands)

Industrial Robots
(in thousands)

10

Plot the Points to Create the Graph

Pizzas (X-axis), Robots(Y-axis)
LO5

Industrial Robots

Production Possibilities Curve

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

A
B

Unattainable

Attainable
E
0

Pizzas
LO5

The law of
increasing
opportunity
costs makes
the PPC
concave.

8 9

Marginal Benefit & Marginal

Cost (MB,MC)

Optimal Allocation
MC
15

a
MB = MC

e
10

LO5

d
MB

2
3
Quantity of Pizza(hundred
thousands)

Industrial Robots

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

A
B

Unattainable

A
B

Economic
Growth

C
C

D
D

Now Attainable

Attainable

E
0

Pizzas
LO6

8 9

A Growing Economy

Economic Growth

LO6

More resources
Improved resource quality
Technological advances

A Growing Economy
Production Alternatives

LO6

Type of Product

A'

B'

C'

D'

E'

Pizzas
(in hundred thousands)

Industrial Robots
(in thousands)

14

12

Industrial Robots

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

A
B

Unattainable

A
B

Economic
Growth

C
C

D
D

Now Attainable

Attainable

E
0

Pizzas
LO6

8 9

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

International Trade

LO6

Specialization
Increased production possibilities

Pitfalls to Sound Economic

Reasoning
Biases

Loaded terminology
Fallacy of composition
Post hoc fallacy
Correlation not causation