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Chapter 1 Limits, Alternatives & Choices By Dr. Laura Lamb & material from McConnell, Brue, Flynn & Barbiero 1.

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Presentation on theme: "Chapter 1 Limits, Alternatives & Choices By Dr. Laura Lamb & material from McConnell, Brue, Flynn & Barbiero 1."— Presentation transcript:

1 Chapter 1 Limits, Alternatives & Choices By Dr. Laura Lamb & material from McConnell, Brue, Flynn & Barbiero 1

2  The social science concerned with how individuals, institutions, and society make best choices under conditions of scarcity. 2

3 The economic way of thinking (aka economic perspective) consists of numerous elements: a) Scarcity & choice b) Purposeful behaviour c) Marginal Analysis 3

4  What is scarce?  What are resources?  The concept of opportunity cost: the next best alternative foregone. 4

5  What is the opportunity cost of attending this class today?  Illustrates that there is no free lunch! 5

6  Rational self-interest entails making decisions to achieve maximum satisfaction i.e. the economic concept of utility.  Different preferences and circumstances lead to different choices.  Rational self-interest is not the same as selfishness. 6

7  the comparison of marginal benefits and marginal costs, usually for decision making.  Most decisions are made on the margin. 7

8  Economics uses scientific method  Observe real world behaviour & outcomes  Based on observations, formulate a hypothesis  Test the hypothesis  Accept, reject, or modify the hypothesis based on testing  Continue to test against facts 8

9  If hypothesis is supported in many trials, the theory becomes an economic principle or economic law.  These economic principles are incorporated into models  Economic theories are developed to explain the behaviour of economic agents 9

10 1. Generalizations 2. Other-things-equal assumption (aka ceteris paribus) 3. Graphical expression 10

11  Microeconomics looks at specific economic units  Macroeconomics examines the economy as a whole 11

12  Positive economics describes the economy as it actually is.  Normative economics involves value judgments about what the economy should be like and the desirability of the policy options available. 12

13 1. The total revenue of Ford Motor Company have risen over the past 2 years. 2. The unemployment rate remains high at the end of 2012. 3. The price of gasoline continues to be volatile. 4. Sears is closing several store locations in 2012. 5. Inflation rates are relatively low. 13

14 1. The unemployment rate is 7.2%. 2. The provincial governments should spend more on health care. 3. The unemployment rate remains lowest in Alberta. 4. The price of asparagus is too high. 14

15  The need to make choices because society’s material wants for goods and services are unlimited but the resources available to satisfy these wants are scarce.  The economic problem is experienced by individuals & society as a whole. 15

16  Individuals are confronted with the need to make choices because their wants exceed their means to satisfy them.  Limited income – everyone, even the most wealthy, has a finite amount of money to spend.  Unlimited wants – people’s wants are virtually unlimited. 16

17  The combination of limited income and unlimited wants force us to choose those goods and services that will maximize our utility.  A budget line is used to illustrate the individual economic problem. 17

18  A schedule or curve that shows the various combinations of two products a consumer can purchase with a specific money income.  Used to identify attainable & unattainable bundles of products.  The budget line can change. When? 18

19  Scarce resources  Resource categories: land, labour, capital, & entrepreneurial ability 19

20  Assumptions of the model: 1.Economy is employing all available resources. 2.Available supply of resources is fixed in quantity and quality at this point in time. 3.Technology is constant during analysis. 4.Economy produces only two types of products. Choices will be necessary because resources and technology are fixed. A production possibilities table illustrates some of the possible choices. 20

21 Production Alternatives ProductABCDE Butter01234 Guns10974q 21

22  The PPC illustrates increasing opportunity costs 22

23 1. What is the total opportunity cost of producing 3 units of butter? 2. When at Production alternative B, what is the opportunity cost of producing 1 more unit of butter? 3. Is the production of 3 units of butter & 3 units of guns attainable? 4. Is the production of 3 units of butter & 7 units of guns attainable? 23

24 What is the economic rationale for increasing opportunity costs? 24

25  How does society decide its optimal point on the production possibilities curve?  Use marginal analysis 25

26  Other uses of the PPC 26

27 1. Biases 2. Loaded terminology 3. Fallacy of composition 4. Causation fallacies ◦ Post hoc fallacy ◦ Correlation versus causation 27

28  The textbook website offers many practice questions to test your understanding of the economic concepts.  Also, do the appendix study questions of graphing. 28

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