Professional Documents
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Chapter 1
Chapter 1
Limits,
Alternatives,
and Choices
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill 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
1-3
The Economic Perspective
1-4
Scarcity and Choice
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
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
$120 Budget 12
DVDs Books
$20 $10
10
6 0 Income = $120
=6
Quantity of DVDs
5 2 8 Pdvd = $20
4 4 6
Unattainable
3 6
4 Income = $120
2 8 Pb = $10
= 12
1 10 2 Attainable
0 12
0
2 4 6 8 10 12 14
Quantity of Paperback Books
1-11
Society’s Economizing Problem
• Scarce resources
–Land
–Labor
–Capital
–Entrepreneurial Ability
• Factors of production
1-12
Production Possibilities Model
1-13
Production Possibilities Table
Production Alternatives
Type of Product A B C D E
Pizzas 0 1 2 3 4
(in hundred thousands)
Industrial Robots 10 9 7 4 0
(in thousands)
1-14
Production Possibilities Curve
14 A’
13
12 B’ Unattainable
11
A
10
Economic
Industrial Robots
B C’
9
8
C
Growth
7
6
D’
5
D
4
3 Now Attainable
2 Attainable
1 E E’
0 1 2 3 4 5 6 7 8 9
Pizzas
1-15
Production Possibilities Curve
14 A’
13
12 B’ Unattainable
11
A
10
Industrial Robots
9
B C’ Law of Increasing
8
C Opportunity Cost
7
6
D’
5
D
Shape of
4
3
the Curve
2 Attainable
1 E E’
0 1 2 3 4 5 6 7 8 9
Pizzas
1-16
Production Possibilities Curve
14 A’
13
12 B’ Unattainable
11
10
Industrial Robots
C’
9
8
7
6 U
D’
5
Under or
4
Unemployment
3
2
1 E’
0 1 2 3 4 5 6 7 8 9
Pizzas
1-17
The Future Economy
• Consequences of unemployment
• Economic growth
–More resources
–Better quality resources
–Technological advances
1-18
Future Possibilities
Future Future
Curve Curve
F
Current P Current
Curve Curve
Presentville Futureville
1-19
International Trade
• Production point
• Consumption point
• Specialization
• Preview
1-20
Optimal Allocation of Resources
MB = MC
10 e
5
b d
MB
0 1 2 3
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 • budget line
• economic perspective • economic resources
• opportunity cost • land
• utility • labor
• marginal analysis • capital
• scientific method
• investment
• economic principle
• entrepreneurial ability
• other-things-equal
assumption • factors of production
• macroeconomics • consumer goods
• aggregate • capital goods
• microeconomics • production possibilities curve
• positive economics • law of increasing opportunity
• normative economics costs
• economizing problem • economic growth 1-23
The Market
System and the
Circular Flow
1-24