1 Limits, Alternatives, and Choices McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

LO1 Introduction Economics defined: Economic wants exceed productive capacity. A social science concerned with making optimal choices under conditions of scarcity.

LO1 The Economic Perspective Thinking like an economist Key features: Scarcity and choice Purposeful behavior Marginal analysis

LO1 Scarcity and Choice Resources are scarce Choices must be made Opportunity cost There’s no free lunch

LO1 Purposeful Behavior Rational self-interest Individuals and utility Firms and profit Desired outcomes

LO1 Marginal Analysis Marginal benefit Marginal cost Marginal means “extra” Comparison between marginal benefit and marginal cost

LO2 Theories, Principles, and Models The scientific method: Economic principles Generalizations Other-things-equal assumption Graphical expression Observe Formulate a hypothesisTest the hypothesis Accept, reject, or modify the hypothesis Continue to test the hypothesis, if necessary

LO3 Microeconomics and Macroeconomics Microeconomics Decision making by individual units Macroeconomics Aggregate

LO3 Positive and Normative Economics Positive economics Deals with economic facts Normative economics A subjective perspective of the economy

LO4 Individual’s Economizing Problem Limited income Unlimited wants A budget line Attainable and unattainable options Tradeoffs and opportunity costs Make the best choice possible Change in income

LO4 Individual’s Economizing Problem DVDs $20 Books $10 $120 Budget Quantity of Paperback Books Quantity of DVDs Income = $120 P dvd = $20 = 6 Income = $120 P b = $10 = 12 Attainable Unattainable

LO4 Global Perspective

LO4 Society’s Economizing Problem Scarce resources Land Labor Capital Entrepreneurial Ability

LO4 Society’s Economizing Problem Entrepreneurial ability Takes initiative Makes decisions Innovates Takes risk

LO5 Production Possibilities Model Illustrates production choices Assumptions: Full employment Fixed resources Fixed technology Two goods

LO5 Production Possibilities Table Type of Product Pizzas (in hundred thousands) Industrial Robots (in thousands) Production Alternatives ABCDE Plot the Points to Create the Graph…

LO5 Production Possibilities Curve Pizzas Industrial Robots Attainable Unattainable A B C D E U The law of increasing opportunity costs makes the PPC concave.

Optimal Allocation LO5 a b c d e MB = MC MC MB Quantity of Pizza Marginal Benefit & Marginal Cost

LO6 A Growing Economy Economic Growth More resources Improved resource quality Technological advances

Type of Product Pizzas (in hundred thousands) Industrial Robots (in thousands) Production Alternatives A'A'B'C'D'E' A Growing Economy LO6

A Growing Economy Pizzas Industrial Robots Attainable Unattainable A B C D E Economic Growth Now Attainable A’ B’ C’ D’ E’

LO6 Present Choices, Future Possibilities Goods for the Present Goods for the Future Goods for the Present P F Current Curve Current Curve Future Curve Future Curve Presentville Futureville

LO6 International Trade Specialization Increased production possibilities

Pitfalls to Sound Economic Reasoning Biases Loaded terminology Fallacy of composition Post hoc fallacy Correlation not causation