After reading this chapter, you should be able to: Define economics and the features of the economic perspective, describe the role of economic theory in economics, distinguish microeconomics from macroeconomics and positive economics from normative economics, list the categories of scarce resources and delineate the nature of the economizing problem,...
01 Limits,Alternatives,andChoices McGrawưHill/Irwin Copyrightâ2012byTheMcGrawưHillCompanies,Inc.Allrightsreserved Introduction LO1 Economics defined • A social science concerned with making optimal choices under conditions of scarcity Economic wants exceed productive capacity 1-2 The Economic Perspective LO1 Scarcity and Choice Purposeful Behavior Marginal Analysis • Resources are scarce • Rational • Marginal self-interest benefit • Choices must • Individuals be made and utility • Marginal cost • Opportunity cost • Firms and profit • Marginal means extra • There’s no free lunch • Desired outcomes • MB and MC 1-3 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 • LO2 Economic principles • Generalizations • Other-things-equal assumption • Graphical expression 1-4 Microeconomics and Macroeconomics • • • • LO3 Microeconomics Decision making by individual units Macroeconomics Examines either the economy as a whole or its basic subdivisions or aggregates 1-5 Positive and Normative Economics • • • • LO3 Positive economics Deals with economic facts Normative economics A subjective perspective of the economy 1-6 Individual’s Economizing Problem • • • • • • • LO4 Limited income Unlimited wants A budget line Attainable and unattainable options Trade-offs and opportunity costs Make the best choice possible Change in income 1-7 Individual’s Economizing Problem DVDs Books $20 $10 60 52 44 36 28 110 012 12 10 Quantity of DVDs $120 Budget Income = $120 Pdvd = $20 =6 Unattainable Income = $120 = 12 Pb = $10 Attainable 10 12 Quantity of Paperback Books LO4 14 1-8 Society’s Economizing Problem • • • • • LO4 Scarce resources Land Labor Capital Entrepreneurial Ability (takes initiatives, makes decisions, innovates, and takes risks) 1-9 Production Possibilities Model • • • • • • LO5 Illustrates production choices Assumptions Full employment Fixed resources Fixed technology Two goods 1-10 Production Possibilities Model 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… LO5 1-11 Industrial Robots Production Possibilities Model 14 13 12 11 A 10 B Unattainable C D U Attainable E 1 The law of increasing opportunity costs makes the PPC concave Pizzas LO5 1-12 Industrial Robots A Growing Economy 14 13 12 11 10 A’ B’ Unattainable A B Economic Growth C’ C D’ D Now Attainable Attainable E’ E Pizzas LO6 1-13 Present Choices, Future Possibilities Future Curve Current Curve P Goods for the Present Presentville LO6 Goods for the Future Goods for the Future Compare Two Hypothetical Economies Future Curve F Current Curve Goods for the Present Futureville 1-14 Pitfalls to Sound Economic Reasoning • • • • • Biases Loaded terminology Fallacy of composition Post hoc fallacy Correlation not causation 1-15 ... Generalizations • Other-things-equal assumption • Graphical expression 1-4 Microeconomics and Macroeconomics • • • • LO3 Microeconomics Decision making by individual units Macroeconomics Examines... subdivisions or aggregates 1-5 Positive and Normative Economics • • • • LO3 Positive economics Deals with economic facts Normative economics A subjective perspective of the economy 1-6 Individual’s Economizing Problem... • Economics defined • A social science concerned with making optimal choices under conditions of scarcity Economic wants exceed productive capacity 1-2 The Economic Perspective LO1 Scarcity and