Professional Documents
Culture Documents
Limits,
Alternatives,
and Choices
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
$120 Budget 12
DVDs Books
$20 $10
10
60 Income = $120
=6
Quantity of DVDs
52 8 Pdvd = $20
44 6
Unattainable
36
Income = $120
28 4
Pb = $10
= 12
110 2 Attainable
012
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
A’
14
13
B’ Unattainable
12
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
A’
14
13
B’ Unattainable
12
11
A
10
Law of Increasing
Industrial Robots
B C’
9
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
A’
14
13
B’ Unattainable
12
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
Current P Current
Curve Curve
Presentville Futureville
1-19
International Trade
• Production point
• Consumption point
• Specialization
• Preview
1-20
Optimal Allocation of Resources
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
• economic principle • investment
• other-things-equal • entrepreneurial ability
assumption • factors of production
• macroeconomics • consumer goods
• aggregate
• capital goods
• microeconomics
• positive economics • production possibilities curve
• normative economics • law of increasing opportunity
• economizing problem costs
• economic growth 1-23
The Market
System and the
Circular Flow
1-24