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01
Limits, Alternatives, and Choices

M cGr aw-Hill/I r win .

Introduction

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

LO1 1-2

The Economic Perspective

• Thinking like an economist

• Key features:
• Scarcity and choice
• Purposeful behavior
• Marginal analysis

LO1 1-3

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Scarcity and Choice

• Resources are scarce

• Choices must be made
• Opportunity cost
• There’s no free lunch

LO1 1-4

Purposeful Behavior

• Rational self-interest
• Individuals and utility
• Firms and profit
• Desired outcomes

LO1 1-5

Marginal Analysis

• Marginal benefit
• Marginal cost
• Marginal means “extra”
• Comparison between marginal
benefit and marginal cost

LO1 1-6

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Theories, Principles, and Models

• The scientific method:

Observe Formulate a hypothesis Test the hypothesis

Accept, reject, or modify the hypothesis

Continue to test the hypothesis, if necessary

• Economic principles
• Generalizations
• Other-things-equal assumption
• Graphical expression

LO2 1-7

Microeconomics and Macroeconomics

• Microeconomics
• Decision making by individual
units
• Macroeconomics
• Aggregate

LO3 1-8

Positive and Normative Economics

• Positive economics
• Deals with economic facts
• Normative economics
• A subjective perspective of
the economy

LO3 1-9

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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 1-10

Individual’s Economizing Problem

$120 Budget 12
DVDs Books
$20 $10 10
6 0 Income = $120
=6
Quantity of DVDs

8 P dvd = $20
5 2
Unattainable
4 4 6
3 6 Income = $120
4 = 12
2 8 P b = $10

1 10 2 Attainable

0 12 0
2 4 6 8 10 12 14
Quantity of Paperback Books

LO4 1-11

Society’s Economizing Problem

• Scarce resources
• Land
• Labor
• Capital
• Entrepreneurial Ability

LO4 1-12

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Society’s Economizing Problem

• Entrepreneurial ability
• Takes initiative
• Makes decisions
• Innovates
• Takes risk

LO4 1-13

Production Possibilities Model

• Illustrates production choices

• Assumptions:
• Full employment
• Fixed resources
• Fixed technology
• Two goods

LO5 1-14

Production Possibilities Table

Production Alternatives
Type of Product A B C D E

Pizzas 0 1 2 3 4
(in hundred thousands)

Industrial Robots 10 9 7 4 0
(in thousands)

Plot the Points to Create the Graph…

LO5 1-15

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Production Possibilities Curve

14 The law of
13
12
increasing
11
10
A
B
opportunity
9
costs makes
Industrial Robots

8
C Unattainable
7
6
the PPC
4
5
D
concave.
U
3
2 Attainable
1 E

0 1 2 3 4 5 6 7 8 9
Pizzas

LO5 1-16

A Growing Economy

• Economic Growth
• More resources
• Improved resource quality
• Technological advances

LO6 1-17

A Growing Economy

Production Alternatives
Type of Product A' B' C' D' E'

Pizzas 0 2 4 6 8
(in hundred thousands)

Industrial Robots 14 12 9 5 0
(in thousands)

LO6 1-18

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A Growing Economy
A’
14
13
B’ Unattainable
12
11
A
10
B C’ Econom ic
Industrial Robots

9
8
C
Grow th
7
6
D’
5
D
4
3
Now Attainable
2 Attainable
1
E E’
0 1 2 3 4 5 6 7 8 9
Pizzas

LO6 1-19

Pitfalls to Sound Economic Reasoning

• Biases
• Loaded terminology
• Fallacy of composition
• Post hoc fallacy
• Correlation not causation

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