1Limits, Alternatives, and ChoicesMcGraw-Hill/IrwinCopyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

IntroductionEconomics definedEconomic wants exceed productive capacityA social science concerned with making optimal choices under conditions of scarcityLO1

The Economic Perspective

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Scarcity and ChoicePurposeful BehaviorMarginal Analysis Resources are scarceRational self-interestMarginal benefitChoices must be made Individuals and utilityMarginal costOpportunity cost Firms and profitMarginal means extra Theres no free lunch Desired outcomesMB and MC

Theories, Principles, and ModelsThe scientific methodEconomic principlesGeneralizationsOther-things-equal assumptionGraphical expressionObserveFormulate a hypothesisTest the hypothesisAccept, reject, or modify the hypothesisContinue to test the hypothesis, if necessaryLO2

Microeconomics and MacroeconomicsMicroeconomicsDecision making by individual unitsMacroeconomicsExamines either the economy as a whole or its basic subdivisions or aggregatesLO3

Positive and Normative EconomicsPositive economicsDeals with economic factsNormative economicsA subjective perspective of the economyLO3

Individuals Economizing ProblemLimited incomeUnlimited wantsA budget lineAttainable and unattainable optionsTrade-offs and opportunity costsMake the best choice possibleChange in incomeLO4

Individuals Economizing ProblemLO4

Societys Economizing ProblemScarce resourcesLandLaborCapitalEntrepreneurial Ability (takes initiatives, makes decisions, innovates, and takes risks)

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Production Possibilities ModelIllustrates production choicesAssumptionsFull employmentFixed resourcesFixed technologyTwo goodsLO5

Type of ProductPizzas (in hundred thousands)Industrial Robots (in thousands)Production AlternativesABCDE10974001234Plot the Points to Create the GraphProduction Possibilities ModelLO5

PizzasIndustrial RobotsAttainable0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1UnattainableABCDEThe law of increasing opportunity costs makes the PPC concave.Production Possibilities ModelLO5

A Growing EconomyPizzasIndustrial RobotsAttainable0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1UnattainableABCDEEconomicGrowthNow AttainableABCDELO6

Present Choices, Future PossibilitiesGoods for the PresentGoods for the FutureGoods for the FutureGoods for the PresentPFCurrentCurveCurrentCurveFutureCurveFutureCurvePresentvilleFuturevilleCompare Two Hypothetical EconomiesLO6

Pitfalls to Sound Economic ReasoningBiasesLoaded terminologyFallacy of compositionPost hoc fallacyCorrelation not causation

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