1. Chapter 1 Limits, Alternatives, and Choices McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter Objectives Economics defined The economic perspective
Microeconomics vs. macroeconomics
Resource scarcity and the economizing problem
Production possibilities model
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3. Economics Defined Economic wants exceed productive capacity
Social science concerned with making optimal choices under conditions of scarcity
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4. The Economic Perspective
Thinking like an economist
Key features:
Scarcity and choice
Purposeful behavior
Marginal analysis
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5. Scarcity and Choice Resources are scarce Choices must be made
There is no free lunch
Opportunity cost
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6. Purposeful Behavior Rational self-interest Individuals and utility
entails making decisions to achieve maximum utility/profit
Individuals and utility
the pleasure or satisfaction obtained from consuming a good or service
Firms and profit
Different preferences and circumstances (including errors) lead to different choices
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7. Marginal Analysis Marginal benefit Marginal cost
Comparison of marginal benefit and marginal cost
Most decisions concern a change in current conditions
The marginal cost of an action should not exceed its marginal benefits
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8. Economic Models The scientific method Economic principles
a. Observation of facts.
b. Formulations of explanations of cause and effect relationships (hypotheses).
c. Testing of the hypotheses.
d. Acceptance, rejection, or modification.
e. The continued testing.
Economic principles
explain and/or predict the behavior of individuals and institutions
Simplification of reality
Other-things-equal assumption
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9. Macro vs. Micro Microeconomics Macroeconomics Positive v.s. Normative
Specific economic units
Concerned with the individual industry, firm or household and the price of specific products and resources.
Macroeconomics
Aggregate; the economy as a whole
includes measures of total output, total employment, total income, aggregate expenditures, and the general price level.
Positive v.s. Normative
‘what is’ v.s. ‘what ought to be’
Scientific v.s. value judgement
Theoritical v.s. policy economics
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10. Individual’s Economizing Problem
Limited income v.s. Unlimited wants
Wants are virtually unlimited.
Wants include necessities and luxuries
Wants change, especially as new products are introduced
Even the wealthiest have wants that extend beyond their means
Involve tradeoffs & opportunity costs
Make best choice possible
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11. A Budget Line
$120 Budget 12 10 8 6 4 2
DVDs
$20
Books
$10 2 4 6 8 10 12 6 5 4 3 2 1
Income = $120
Pdvd = $20
= 6
Unattainable
Quantity of DVDs
Income = $120
Pb = $10
= 12
Attainable
Quantity of Paperback Books
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12. Society’s Economizing Problem
Scarce resources
Land
Labor
Capital
E.g. tools, equipment, factories, transportation, etc.
Entrepreneurial Ability
a. Combines resources needed for production.
b. Makes basic business policy decisions.
c. Is an innovator for new products, production techniques, organizational forms.
d. Bears the risk of time, effort, and funds.
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13. Production Possibilities Model
Illustrate production choices
Assumptions:
Full employment
Fixed resources
Fixed technology
Two goods
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14. 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…
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15. Production Possibilities CurveA’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’
Unattainable A
Economic
Growth B C’ C
Industrial Robots D’ D
Now Attainable
Attainable E E’
Pizzas
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16. Production Possibilities CurveA’ 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 E E’
Pizzas
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17. The Future Economy Consequences of unemployment Economic growth
More resources
Better quality resources
Technological advances
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18. Future Possibilities Compare Two Hypothetical Economies Presentville
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
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19. Optimal Allocation of ResourcesMC a c 15 10 5
MB = MC e
Marginal Benefit & Marginal Cost b d MB
Quantity of Pizza
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