Chapter 1 - Limits, alternatives, and choices. This chapter introduces many of the fundamental concepts in economics, and we cover a wide variety of concepts. We start with the definition of economics; then we will discuss the economic perspective. Then the discussion moves to the development of economic theory.
Chapter Limits, Alternatives, and Choices McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved 11 Introduction • Economics defined: • Economic wants exceed productive capacity • A social science concerned with making optimal choices under conditions of scarcity 12 LO1 The Economic Perspective • • Thinking like an economist Key features: • Scarcity and choice • Purposeful behavior • Marginal analysis 13 LO1 Scarcity and Choice • • • Resources are scarce Choices must be made Opportunity cost • There’s no free lunch 14 LO1 Purposeful Behavior • • • • Rational self-interest Individuals and utility Firms and profit Desired outcomes 15 LO1 Marginal Analysis • • • • Marginal benefit Marginal cost Marginal means “extra” Comparison between marginal benefit and marginal cost 16 LO1 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 17 LO2 Microeconomics and Macroeconomics • • Microeconomics • Decision making by individual units Macroeconomics • Aggregate 18 LO3 Individual’s Economic Problem • • • • Limited income Unlimited wants A budget line • Attainable and unattainable options • Trade-offs and opportunity costs • Make the best choice possible Change in income 19 LO4 Individual’s Economizing Problem $120 Budget 12 DVDs $20 Books $10 10 0 10 12 Quantity of DVDs Income = $120 Pdvd = $20 Unattainable =6 Income = $120 Pb = $10 Attainable 10 12 Quantity of Paperback Books LO4 = 12 14 110 Global Snapshot Average Income, Selected Nations 111 LO4 Society’s Economic Problem • Scarce resources • Land • Labor • Capital • Entrepreneurial ability 112 LO4 Society’s Economizing Problem • Entrepreneurial ability • Takes initiative • Makes decisions • Innovates • Takes risk 113 LO4 Production Possibilities Model • • Illustrates production choices Assumptions: • Full employment • Fixed resources • Fixed technology • Two goods 114 LO5 Production Possibilities Table Production Alternatives Type of Product Pizzas A B C D E 10 (in hundred thousands) Industrial Robots (in thousands) Plot the Points to Create the Graph… 115 LO5 Industrial Robots Production Possibilities Curve 14 13 12 11 10 A B Unattainable C D Attainable E Pizzas LO5 The law of increasing opportunity costs makes the PPC concave 116 Law of Increasing Opportunity Costs • As production of a good increases, the opportunity cost of producing an additional unit rises 117 LO5 Marginal Benefit & Marginal Cost Optimal Allocation MC 15 MB = MC e 10 b LO5 c a d MB Quantity of Pizza 118 Unemployment, Growth, and the Future • Unemployment limits how much can • • be produced Production will be at a point inside the PPC Moving toward full employment will increase output 119 A Growing Economy • Economic growth • More resources • Improved resource quality • Technological advances 120 LO6 A Growing Economy Production Alternatives Type of Product Food products (hundred thousands) A' B' C' D' E' 12 Manufacturing equipment 14 (thousands) 121 LO6 Manufacturing Equipment (thousands) A Growing Economy 14 13 12 11 10 A' B' A B C D' D E' E LO6 C' Food Products (hundred thousands) 122 Future Curve Current Curve P Goods for the Present Presentville Goods for the Future Goods for the Future Present Choices, Future Possibilities Future Curve F Current Curve Goods for the Present Futureville 123 LO6 ... = $20 Unattainable =6 Income = $12 0 Pb = $10 Attainable 10 12 Quantity of Paperback Books LO4 = 12 14 1 10 Global Snapshot Average Income, Selected Nations 1 11 LO4 Society’s Economic Problem... Graph… 1 15 LO5 Industrial Robots Production Possibilities Curve 14 13 12 11 10 A B Unattainable C D Attainable E Pizzas LO5 The law of increasing opportunity costs makes the PPC concave 1 16 Law of Increasing Opportunity Costs... Trade-offs and opportunity costs • Make the best choice possible Change in income 1 9 LO4 Individual’s Economizing Problem $12 0 Budget 12 DVDs $20 Books $10 10 0 10 12 Quantity of DVDs Income = $12 0