1 Limits, Alternatives, and Choices

Chapter Objectives Economics Defined Role of Economic Theory Economic Perspective Role of Economic Theory Microeconomics and Macroeconomics Scarce Resources The Economizing Problem Production Possibilities O 1.1

The Economic Perspective Scarcity and Choice Opportunity Cost Purposeful Behavior Utility Marginal Analysis Marginal Benefits Marginal Costs O 1.2 O 1.3

Theories Principles and Models The Scientific Method Economic Principle Generalizations Other-Things-Equal Assumption (ceteris paribus) Graphical Expression O 1.4

Macro and Microeconomics Macroeconomics Aggregate Microeconomics Individual Units Positive Economics Normative Economics

Individual’s Economizing Problem Limited Income Unlimited Wants A Budget Line Attainable and Unattainable Combinations Tradeoffs & Opportunity Costs Choice Income Change O 1.5 W 1.1

Individual’s Economizing Problem GLOBAL PERSPECTIVE Average Income, Selected Nations Country Per Capita Income 2004 Switzerland United States Japan France South Korea Mexico Brazil China Pakistan Nigeria Rwanda Liberia $48,230 41,400 37,180 30,090 13,980 6,770 3,090 1,290 600 390 220 110 Source: World Bank

Individual’s Economizing Problem $120 Budget 12 10 8 6 4 2 DVDs $20 Books $10 6 5 4 3 2 1 2 4 6 8 10 12 Income = $120 Pdvd = $20 = 6 Unattainable Quantity of DVDs Income = $120 Pb = $10 = 12 Attainable 2 4 6 8 10 12 14 Quantity of Books

Society’s Economizing Problem Scarce Resources Resource Categories Land Labor Capital Investment Entrepreneurial Ability Factors of Production

Production Possibilities Model Full Employment Fixed Resources Fixed Technology Two Goods Consumer Goods (Pizzas) Capital Goods (Industrial Robots)

Production Possibilities Model Production Possibilities Table Production Alternatives Type of Product A B C D E Pizzas (in hundred thousands) 1 2 3 4 Industrial Robots (in thousands) 10 9 7 4 Plot Points to Create Graph…

Production Possibilities Model Production Possibilities Curve A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 G 1.1 B’ Unattainable A Economic Growth B C’ C Industrial Robots D’ D Now Attainable Attainable E E’ 0 1 2 3 4 5 6 7 8 9 Pizzas

Production Possibilities Model Production Possibilities Curve A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ Unattainable A Law of Increasing Opportunity Cost B C’ C Industrial Robots D’ Shape of the Curve D Attainable W 1.2 E E’ 0 1 2 3 4 5 6 7 8 9 Pizzas

Production Possibilities Model Production Possibilities Curve A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ Unattainable C’ Industrial Robots U D’ Under or Unemployment E’ 0 1 2 3 4 5 6 7 8 9 Pizzas

Production Possibilities Model Optimal Allocation of Resources MC a c 15 10 5 MB = MC e Marginal Benefit & Marginal Cost b d MB 1 2 3 Quantity of Pizza

Unemployment Growth and the Future A Growing Economy Economic Growth Increasing Resource Supplies Increasing Resource Quality Technological Advances

Present Choices & Future Possibilities G 1.2 Compare Two Hypothetical Economies Future Curve Future Curve F Goods for the Future Goods for the Future P Current Curve Current Curve Goods for the Present Goods for the Present Presentville Futureville Implications of International Trade

Pitfalls to Sound Economic Reasoning Last Word Biases Loaded Terminology Fallacy of Composition Post Hoc Fallacy Correlation but not Causation

Key Terms economics economic perspective opportunity cost utility marginal analysis scientific method economic principle other-things-equal assumption macroeconomics aggregate microeconomics positive economics normative economics economizing problem budget line economic resources land labor capital investment entrepreneurial ability factors of production consumer goods capital goods production possibilities curve law of increasing opportunity costs economic growth

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