1. 1
Limits, Alternatives, and Choices

2. 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

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

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

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

6. 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

7. 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

8. 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
Quantity of Books

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

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

11. 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…

12. 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’
Pizzas

13. 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’
Pizzas

14. 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’
Pizzas

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

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

17. 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

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

19. 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

20. The Market System and the Circular Flow
Next Chapter Preview…
The Market System and the Circular Flow
Chapter 2 Next!