Download - Chapter 1 narrated power point
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Chapter 1Limits, Alternatives, and Choices
McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education. All rights reserved.
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Economics
• Economics • A social science concerned with making
optimal choices under conditions of scarcity• Economic wants exceed society’s productive
capacity
LO1
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The Economic Perspective
• Economic perspective• Scarcity and choice• Opportunity cost• Purposeful behavior to increase utility• Marginal analysis
LO1
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Scarcity and Choice
• Resources are scarce• Choices must be made• Opportunity cost
• There’s no free lunch
LO1
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Purposeful Behavior
• Rational self-interest• Individuals and utility• Firms and profit• Desired outcome
LO1
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Marginal Analysis
• Marginal benefit• Marginal cost• Marginal means “extra”• Comparison between marginal benefit and
marginal cost
LO1
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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
LO2
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Economic Principle
• Generalizations• Other-things-equal assumption
• Ceteris paribus• Graphical expression
LO2
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Micro and Macro
• Microeconomics • The study of the individual consumer, firm,
or market• Macroeconomics
• The study of the entire economy or a major aggregate of the economy
LO3
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Positive and Normative Economics
• Positive economics• Economic statements that are factual
• Normative economics• Economic statements that involve value
judgments
LO3
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The Economizing Problem
• The economizing problem• Limited income and unlimited wants• The budget line• Attainable and unattainable combinations• Trade-offs and opportunity costs
LO4
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The Consumer’s Budget Line12
10
8
6
4
2
0 2 4 6 8 10 12 14
Income = $120Pdvd = $20
= 6
Income = $120Pb = $10
= 12
Attainable
Unattainable
LO4
The Budget Line: Combinations of DVDs and Books Attainable with $120
Units of DVDs
(Price = $20)
Units of Books
(Price=$10)Total
Expenditure
6 0 $1205 2 $1204 4 $1203 6 $1202 8 $1201 10 $1200 12 $120
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Global Perspective
LO4
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Society’s Economizing Problem
• 4 categories of economic resources• Land• Labor• Capital
• Investment• Entrepreneurial ability
LO5
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Society’s Economizing Problem
• Entrepreneurs• Employs the other factors of production• Takes initiative• Makes strategic business decisions• Innovates• Takes risk
LO5
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Production Possibilities Model
• Economic model that shows different combinations of two goods that an economy can produce
• Full employment• Fixed resources• Fixed technology• 2-good economy• Consumer goods and capital goods
LO6
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Production Possibilities Model
Type of Product
Pizzas (in hundred thousands)
Industrial Robots (in thousands)
Production Alternatives
A B C D E
10 9 7 4 0
0 1 2 3 4
Plot the points to create the graph…
LO6
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Production Possibilities Graph
0 1 2 3 4 5 6 7 8 9
Unattainable
1413121110 9 8 7 6 5 4 3 2 1
A
B
C
D
EAttainable
W
Q
Q
LO6 Pizzas
Indu
stria
l rob
ots
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Increasing Opportunity Costs
• Law of increasing opportunity costs• As more of a particular good is produced,
its marginal opportunity costs increase• Production possibilities curve
• Concave shape• Economic rationale
LO6
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Optimal OutputM
argi
nal b
enefi
t & m
argi
nal c
ost
Quantity of pizza
15
10
5
01 2 3
MC
MB
MB = MC
e
a
b
c
d
LO6
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A Growing Economy
Type of Product
Pizzas (in hundred thousands)
Industrial Robots (in thousands)
Production Alternatives
A' B' C' D' E'
14 12 9 5 0
0 2 4 6 8
LO7
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Unemployment, Growth, & the Future
• Economic growth
Pizzas
Indu
stria
l rob
ots
Attainable
0 1 2 3 4 5 6 7 8 9
1413121110 9 8 7 6 5 4 3 2 1
UnattainableAB
C
D
E
Now attainable
A’
B’
C’
D’
E’
LO7
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Present Choices, Future Possibilities
Goods for the present
Good
s for
the
futu
re
Good
s for
the
futu
re
Goods for the present
P
F
Currentcurve
Currentcurve
FutureCurve
FutureCurve
Presentville Futureville
LO7
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International Trade
• Specialization• Increased production possibilities
LO7
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Pitfalls to Sound Economic Reasoning
• Biases• Loaded terminology• Fallacy of composition• Post hoc fallacy• Correlation not causation