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 Role of economic theory
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
Firms and profit
Desired outcomes
1-6

7. Marginal Analysis Marginal benefit Marginal cost Marginal means extra
Comparison of marginal benefit and marginal cost
1-7

8. Economic Models The scientific method Cause and effect
Economic principles
Simplification of reality
Other-things-equal assumption
Graphical expression
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9. Macro vs. Micro Macroeconomics Microeconomics Positive Economics
Aggregate
Microeconomics
Individual Units
Positive Economics
Normative Economics
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10. Individual’s Economizing Problem
Limited income
Unlimited wants
A budget line
Tradeoffs & opportunity costs
Make best choice possible
Change in income
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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
1-11

12. Society’s Economizing Problem
Scarce resources
Land
Labor
Capital
Entrepreneurial Ability
Factors of production
1-12

13. Production Possibilities Model
Illustrate production choices
Assumptions:
Full employment
Fixed resources
Fixed technology
Two goods
1-13

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…
1-14

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
1-15

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
1-16

17. Production Possibilities CurveA’ 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
1-17

18. The Future Economy Consequences of unemployment Economic growth
More resources
Better quality resources
Technological advances
1-18

19. 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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20. International Trade Production point Consumption point Specialization
Preview
1-20

21. 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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22. LAST Word: Pitfalls to Sound Economic Reasoning
Biases
Loaded terminology
Fallacy of composition
Post hoc fallacy
Correlation but not causation
1-22

23. 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
1-23

24. The Market System and the Circular Flow
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The Market System and the Circular Flow
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