Chapter 1

Limits, Alternatives, and

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

LO

1-2

The Economic Perspective

Economic perspective
Scarcity and choice
Opportunity cost
Purposeful behavior to increase
utility
Marginal analysis

LO

1-3

Scarcity and Choice

Resources are scarce
Choices must be made
Opportunity cost
Theres no free lunch

LO

1-4

Purposeful Behavior

LO

Rational self-interest
Individuals and utility
Firms and profit
Desired outcome

1-5

Marginal Analysis

LO

Marginal benefit
Marginal cost
Marginal means extra
Comparison between marginal
benefit and marginal cost

1-6

Theories, Principles, and

Models
The scientific method
Formulate a
hypothesis
Accept, reject, or modify the
hypothesis
Continue to test the hypothesis, if
necessary

Observ
e

LO

Test the
hypothesis

1-7

Economic Principle
Generalizations
Other-things-equal assumption
Ceteris paribus
Graphical expression

LO

1-8

Micro and Macro

Microeconomics
The study of the individual
consumer, firm, or market
Macroeconomics
The study of the entire economy or
a major aggregate of the
economy

LO

1-9

Positive and Normative

Economics
Positive economics
Economic statements that are
factual
Normative economics
Economic statements that involve
value judgments

LO

1-10

The Economizing Problem

The economizing problem

Limited income and unlimited wants
The budget line
Attainable and unattainable
combinations
Trade-offs and opportunity costs

LO

1-11

The Consumers Budget Line

12
The Budget Line:
Combinations of DVDs and
Books Attainable with $120

LO

Units of
DVDs
(Price =
$20)

Units of
Books
(Price=$1
0)

Total
Expendit
ure

$120

$120

$120

$120

$120

10

$120

12

$120

10

Income = $120
=6
Pdvd = $20

Unattainable
6
Income = $120
= 12
Pb = $10

4
2
0

Attainable

10

12
1-12

Global Perspective

LO

1-13

Societys Economizing
Problem
4 categories of economic
resources
Land
Labor
Capital
Investment
Entrepreneurial ability
LO

1-14

Societys Economizing
Problem
Entrepreneurs
Employs the other factors of
production
Takes initiative
Makes strategic business decisions
Innovates
Takes risk
LO

1-15

Production Possibilities Model

Economic model that shows different
combinations of two goods that an
economy can produce
Full employment
Fixed resources
Fixed technology
2-good economy
Consumer goods and capital goods
LO

1-16

Production Possibilities Model

Production Alternatives
Type of Product

Pizzas

10

(in hundred thousands)

Industrial Robots
(in thousands)

Plot the points to create the graph

LO

1-17

Production Possibilities Graph

Industrial robots

LO

14
13
12
11
A
10
B
9
8
C
7
6
5
D
4
3
2 Attainable
1
E
0 1 2 3

Unattainable
W

Pizzas

Q
1-18

Increasing Opportunity Costs

Law of increasing opportunity
costs
As more of a particular good is
produced, its marginal opportunity
costs increase
Production possibilities curve
Concave shape
Economic rationale
LO

1-19

Marginal benefit & marginal

cost

Optimal Output
1
5

MC
c

a
MB = MC

1
0

d
MB

5
1
LO

2
3
Quantity
of

1-20

A Growing Economy
Production Alternatives
Type of Product

Pizzas

A'

B'

C'

D'

E'

14

12 9

(in hundred thousands)

Industrial Robots
(in thousands)

LO

1-21

Unemployment, Growth, & the

Future

Industrial robots

Economic growth

LO

14
13
12
11
10
9
8
7
6
5
4
3
2
1

A
B

Unattainable

A
B

C
C
D
D

Now attainable

Attainable

E
0

3 4 5
Pizzas

1-22

Future
Curve

Current
curve

Goods for the present

Presentvill
e
LO

Goods for the future

Goods for the future

Present Choices, Future

Possibilities

Future
Curve
F

Current
curve

Goods for the present

Futureville
1-23

International Trade
Specialization
Increased production possibilities

LO

1-24

Pitfalls to Sound Economic

Reasoning

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

1-25