limits, alternatives, and choices · 2 1 0 0 2 4 6 8 10 12 dvds $20 books $10 $120 budget 12 10 8 6...

01

Limits, Alternatives, and Choices

LO1

Introduction

• Economics defined:

• Economic wants exceed productive capacity.

• A social science concerned with making optimal choices under conditions of scarcity.

1-2

LO1

The Economic Perspective

• Thinking like an economist

• Key features:

• Scarcity and choice

• Purposeful behavior

• Marginal analysis

1-3

LO1

Scarcity and Choice

• Resources are scarce

• Choices must be made

• Opportunity cost

• There’s no free lunch

1-4

LO1

Purposeful Behavior

• Rational self-interest

• Individuals and utility

• Firms and profit

• Desired outcomes

1-5

LO1

Marginal Analysis

• Marginal benefit

• Marginal cost

• Marginal means “extra”

• Comparison between marginal benefit and marginal cost

1-6

LO2

Theories, Principles, and Models

• The scientific method:

• Economic principles

• Generalizations

• Other-things-equal assumption

• Graphical expression

Observe Formulate a hypothesis Test the hypothesis

Accept, reject, or modify the hypothesis

Continue to test the hypothesis, if necessary

1-7

LO3

Microeconomics and Macroeconomics

• Microeconomics

• Decision making by individual units

• Macroeconomics

• Aggregate

1-8

LO3

Positive and Normative Economics

• Positive economics

• Deals with economic facts

• Normative economics

• A subjective perspective of the economy

1-9

LO4

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 income1-10

LO4


6543210

02468

1012

DVDs$20

Books$10

$120 Budget 12

10

8

6

4

2

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

Qua

ntity

of D

VDs

1-11

LO4


6543210

02468

1012

DVDs$20

Books$10

$120 Budget 12

10

8

6

4

2

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

Qua

ntity

of D

VDs

1-11

Income = $120Pdvd = $20

= 6

Income = $120Pb = $10

= 12

Attainable

Unattainable

LO4

Global Perspective

1-12

LO4

Society’s Economizing Problem

• Scarce resources

• Land

• Labor

• Capital

• Entrepreneurial Ability

1-13

LO4

Society’s Economizing Problem

• Entrepreneurial ability

• Takes initiative

• Makes decisions

• Innovates

• Takes risk

1-14

LO5

Production Possibilities Model

• Illustrates production choices

• Assumptions:

• Full employment

• Fixed resources

• Fixed technology

• Two goods

1-15

LO5

Production Possibilities Table

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…

1-16

LO5

Production Possibilities Curve

1-17

Indu

stria

l Rob

ots

Pizzas0 1 2 3 4 5 6 7 8 9

1413121110

987654321

AB

C

D

E

Attainable

Unattainable

LO5


1-17

B

C

D

Indu

stria

l Rob

ots

Pizzas0 1 2 3 4 5 6 7 8 9

1413121110

987654321

AB

C

D

E

Attainable

Unattainable

LO5


1-17

B

C

D

B

C

D

Indu

stria

l Rob

ots

Pizzas0 1 2 3 4 5 6 7 8 9

1413121110

987654321

AB

C

D

E

Attainable

Unattainable

LO5


1-17

B

C

D

B

C

DUIn

dust

rial R

obot

s

Pizzas0 1 2 3 4 5 6 7 8 9

1413121110

987654321

AB

C

D

E

Attainable

Unattainable

LO5


1-17

B

C

D

B

C

DU

The law of increasing opportunity costs makes the PPC concave.

Indu

stria

l Rob

ots

Pizzas0 1 2 3 4 5 6 7 8 9

1413121110

987654321

AB

C

D

E

Attainable

Unattainable

Optimal Allocation

LO5 1-18

Mar

gina

l Ben

efit

& M

argi

nal C

ost

15

10

5

0

Quantity of Pizza1 2 3

Q tit f Pi

MB

MC

b d

MB = MC

Optimal Allocation

LO5 1-18

a

Mar

gina

l Ben

efit

& M

argi

nal C

ost

15

10

5

0


Q tit f Pi

MB

MC

b d

MB = MC

Optimal Allocation

LO5 1-18

a cM

Mar

gina

l Ben

efit

& M

argi

nal C

ost

15

10

5

0


Q tit f Pi

MB

MC

b d

MB = MC

Optimal Allocation

LO5 1-18

a cM

e

Mar

gina

l Ben

efit

& M

argi

nal C

ost

15

10

5

0


Q tit f Pi

MB

MC

b d

MB = MC

LO6

A Growing Economy

• Economic Growth

• More resources

• Improved resource quality

• Technological advances

1-19

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

A Growing Economy

LO6 1-20

LO6

A Growing Economy

Pizzas

Indu

stria

l Rob

ots

Attainable

0 1 2 3 4 5 6 7 8 9

1413121110

987654321

Unattainable

AB

C

D

E

1-21

A’

B’

C’

D’

E’

Attainable

AB

C

D

E

EconGrow

B’

C’

D’

Attainable

AB

C

D

E

EconGrow

B’

C’

D’

Now Attainable

LO6

A Growing Economy

Pizzas

Indu

stria

l Rob

ots

Attainable

0 1 2 3 4 5 6 7 8 9

1413121110

987654321

Unattainable

AB

C

D

E

1-21

EconomicGrowth

A’

B’

C’

D’

E’

Attainable

AB

C

D

E

EconGrow

B’

C’

D’

Attainable

AB

C

D

E

EconGrow

B’

C’

D’

Now Attainable

LO6

Present Choices, Future Possibilities

Presentville Futureville

1-22

Goo

ds fo

r the

Fut

ure

Goo

ds fo

r the

Fut

ure

Goods for the Present Goods for the Present

CurrentCurve

CurrentCurve

t P

F

FutureCurve

F

CurrentCurve

FutureCurve

LO6

Present Choices, Future Possibilities

Presentville Futureville

1-22

PCurrentCurveG

oods

for t

he F

utur

e

Goo

ds fo

r the

Fut

ure

Goods for the Present Goods for the Present

CurrentCurve

CurrentCurve

t P

F

FutureCurve

F

CurrentCurve

FutureCurve

LO6

International Trade

• Specialization

• Increased production possibilities

1-23

Pitfalls to Sound Economic Reasoning

• Biases

• Loaded terminology

• Fallacy of composition

• Post hoc fallacy

• Correlation not causation

1-24

limits, alternatives, and choices · 2 1 0 0 2 4 6 8 10 12 dvds $20 books $10 $120 budget 12 10 8 6...

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