1

Limits, Alternatives, and Choices

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 Introduction

• Economics defined
• Economic wants exceed
productive capacity
• A social science concerned
with making optimal choices
under conditions of scarcity

LO1
 The Economic Perspective
Scarcity and Purposeful Marginal
Choice Behavior Analysis

• Resources • Rational • Marginal

are scarce self-interest benefit
• Choices must • Individuals • Marginal cost
be made and utility
• Opportunity • Firms and • Marginal
cost profit means extra
• There’s no • Desired • MB and MC
free lunch outcomes

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
LO2
 Microeconomics and Macroeconomics

• Microeconomics
• Decision making by individual
units
• Macroeconomics
• Examines either the economy
as a whole or its basic
subdivisions or aggregates

LO3
 Positive and Normative Economics

• Positive economics
• Deals with economic facts
• Normative economics
• A subjective perspective of
the economy

LO3
 Individual’s Economizing 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
LO4
 Individual’s Economizing Problem

$120 Budget 12
DVDs Books
$20 $10
10
60 Income = $120
=6
Pdvd = $20
52
Quantity of DVDs
8
Unattainable
44 6
36 Income = $120
4 = 12
28 Pb = $10

110 2 Attainable

012
0
2 4 6 8 10 12 14
Quantity of Paperback Books

LO4
 Society’s Economizing Problem
• Scarce resources
• Land
• Labor
• Capital
• Entrepreneurial Ability
(takes initiatives, makes
decisions, innovates, and
takes risks)

LO4
 Production Possibilities Model

• Illustrates production choices

• Assumptions
• Full employment
• Fixed resources
• Fixed technology
• Two goods

LO5
 Production Possibilities Model

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…

LO5
 Production Possibilities Model

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

9
8
7
C Unattainable costs makes
6
5
the PPC
4 U
D
concave.
3
2 Attainable
1 E
0 1 2 3 4 5 6 7 8 9
Pizzas

LO5
 A Growing Economy
A’
14
13
B’ Unattainable
12
11
A
10
B C’ Economic
Industrial Robots

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

LO6
 Present Choices, Future Possibilities
Compare Two Hypothetical Economies

Future Future
Goods for the Future

Goods for the Future

Curve Curve
F

Current P Current
Curve Curve

Goods for the Present Goods for the Present

Presentville Futureville

LO6
Pitfalls to Sound Economic Reasoning

• Biases
• Loaded terminology
• Fallacy of composition
• Post hoc fallacy
• Correlation not causation