Chapter 1

Limits, Alternatives,
and Choices

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
1-1
 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
LO1
 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

• Economic principles
• Generalizations
• Other-things-equal assumption
• Graphical expression
1-7
LO2
 Microeconomics and Macroeconomics

• Microeconomics
• Decision making by individual
units
• Macroeconomics
• Aggregate

1-8
LO3
 Individual’s Economic Problem

• Limited income
• Unlimited wants
• A budget line
• Attainable and unattainable options
• Trade-offs and opportunity costs
• Make the best choice possible
• Change in income
1-9
LO4
 Individual’s Economizing Problem

$120 Budget 12
DVDs Books
$20 $10 10
6 0 Income = $120
=6
8 Pdvd = $20
5 2 Quantity of DVDs
4 4 6 Unattainable

3 6
4
2 8 Income = $120
= 12
Pb = $10
1 10 2
Attainable
0 12
0

2 4 6 8 10 12 14
Quantity of Paperback Books 1-10
LO4
 Global Snapshot

Average Income, Selected Nations

1-11
LO4
 Society’s Economic Problem

• Scarce resources
• Land
• Labor
• Capital
• Entrepreneurial ability

1-12
LO4
 Society’s Economizing Problem

• Entrepreneurial ability
• Takes initiative
• Makes decisions
• Innovates
• Takes risk

1-13
LO4
 Production Possibilities Model

• Illustrates production choices

• Assumptions:
• Full employment
• Fixed resources
• Fixed technology
• Two goods
1-14
LO5
 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)

Plot the Points to Create the Graph…

1-15
LO5
 Production Possibilities Curve

14
13 The law of
12
11
A
increasing
10
opportunity
Industrial Robots

B
9
8
C Unattainable costs makes
7
6 the PPC
5
4
D concave.
3
2 Attainable
1 E
0 1 2 3 4 5 6 7 8 9
Pizzas 1-16
LO5
 Law of Increasing Opportunity
Costs
• As production of a good increases, the
opportunity cost of producing an
additional unit rises.

1-17
LO5
 Optimal Allocation

MC
Marginal Benefit & Marginal Cost

15
a c
MB = MC

e
10

5
b d
0 MB
1 2 3
1-18
LO5 Quantity of Pizza
 Unemployment, Growth, and the
Future
• Unemployment limits how much can be
produced
• Production will be at a point inside the
PPC
• Moving toward full employment will
increase output

1-19
 A Growing Economy

• Economic growth
• More resources
• Improved resource
quality
• Technological advances

1-20
LO6
 A Growing Economy

Production Alternatives
Type of Product A' B' C' D' E'

Food products 0 2 4 6 8
(hundred thousands)

Manufacturing equipment 14 12 9 5 0
(thousands)

1-21
LO6
 A Growing Economy
Manufacturing Equipment (thousands)
A'
14
13
B'
12
11
A
10
B C'
9
8
C
7
6
D'
5
D
4
3
2
1 E E'
0 1 2 3 4 5 6 7 8 9
1-22
LO6 Food Products (hundred thousands)
 Present Choices, Future
Goods for the Future Possibilities

Goods for the Future

Future Future
Curve Curve
F

Current P Current
Curve Curve

Goods for the Present Goods for the Present

Presentville Futureville
1-23
LO6