Chapter 1 - limits, alternatives, and choices. In this chapter, you will learn 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.
Chapter Limits, Alternatives, and Choices McGrawHill/Irwin Copyright © 2009 by The McGrawHill Companies, Inc. All rights reserved Chapter Objectives • Economics defined • Role of economic theory • Microeconomics vs macroeconomics • Resource scarcity and the economizing problem • Production possibilities model 1-2 Economics Defined • Economic wants exceed productive capacity • Social science concerned with making optimal choices under conditions of scarcity 1-3 The Economic Perspective • Thinking like an economist • Key features: – Scarcity and choice – Purposeful behavior – Marginal analysis 1-4 Scarcity and Choice • • • • Resources are scarce Choices must be made There is no free lunch Opportunity cost 1-5 Purposeful Behavior • • • • Rational self-interest Individuals and utility Firms and profit Desired outcomes 1-6 Marginal Analysis • • • • Marginal benefit Marginal cost Marginal means extra Comparison of marginal benefit and marginal cost 1-7 Economic Models • • • • • • The scientific method Cause and effect Economic principles Simplification of reality Other-things-equal assumption Graphical expression 1-8 Macro vs Micro • Macroeconomics – Aggregate • Microeconomics – Individual Units • Positive Economics • Normative Economics 1-9 Individual’s Economizing Problem • • • • • • Limited income Unlimited wants A budget line Tradeoffs & opportunity costs Make best choice possible Change in income 1-10 A Budget Line DVDs Books $20 $10 60 52 44 36 28 110 012 12 10 Income = $120 Quantity of DVDs $120 Budget Unattainable Income = $120 = 12 Pb = $10 =6 Pdvd = $20 Attainable 10 12 Quantity of Paperback Books 14 1-11 Society’s Economizing Problem • Scarce resources – Land – Labor – Capital – Entrepreneurial Ability • Factors of production 1-12 Production Possibilities Model • Illustrate production choices • Assumptions: – Full employment – Fixed resources – Fixed technology – Two goods 1-13 Production Possibilities Table Production Alternatives Type of Product Pizzas A B C D E 10 (in hundred thousands) Industrial Robots (in thousands) Plot Points to Create Graph… 1-14 Industrial Robots Production Possibilities Curve 14 13 12 11 10 A’ B’ Unattainable A B Economic Growth C’ C D’ D Now Attainable Attainable E’ E Pizzas 1-15 Industrial Robots Production Possibilities Curve 14 13 12 11 10 A’ B’ Unattainable A B Law of Increasing Opportunity Cost C’ C D’ Shape of the Curve D Attainable E’ E Pizzas 1-16 Industrial Robots Production Possibilities Curve A’ 14 13 12 11 10 B’ Unattainable C’ U D’ Under or Unemployment E’ Pizzas 1-17 The Future Economy • Consequences of unemployment • Economic growth – More resources – Better quality resources – Technological advances 1-18 Future Curve Current Curve P Goods for the Present Presentville Goods for the Future Goods for the Future Future Possibilities Future Curve F Current Curve Goods for the Present Futureville 1-19 International Trade • • • • Production point Consumption point Specialization Preview 1-20 Marginal Benefit & Marginal Cost Optimal Allocation of Resources 15 a c MC MB = MC e 10 b d MB Quantity of Pizza 1-21 LAST Word: Pitfalls to Sound Economic Reasoning • • • • • Biases Loaded terminology Fallacy of composition Post hoc fallacy Correlation but not causation 1-22 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 1-23 • economic growth The Market System and the Circular Flow 1-24 ... income 1- 10 A Budget Line DVDs Books $20 $10 60 52 44 36 28 11 0 012 12 10 Income = $12 0 Quantity of DVDs $12 0 Budget Unattainable Income = $12 0 = 12 Pb = $10 =6 Pdvd = $20 Attainable 10 12 Quantity... Possibilities Curve 14 13 12 11 10 A’ B’ Unattainable A B Economic Growth C’ C D’ D Now Attainable Attainable E’ E Pizzas 1- 15 Industrial Robots Production Possibilities Curve 14 13 12 11 10 A’ B’ Unattainable... Curve D Attainable E’ E Pizzas 1- 16 Industrial Robots Production Possibilities Curve A’ 14 13 12 11 10 B’ Unattainable C’ U D’ Under or Unemployment E’ Pizzas 1- 17 The Future Economy • Consequences