LIMITS, ALTERNATIVES, AND CHOICES Pertemuan 1 Matakuliah : J0594-Teori Ekonomi Tahun : 2009 LIMITS, ALTERNATIVES, AND CHOICES Pertemuan 1

The Economic Perspective Scarcity and Choice - Scarce economic resources mean limited goods and Services - Scarcity restrics options and demand choice Purposeful behavior - Economics assumes that human behavior reflects “rational self- interst” - Purposeful behavior does not assume that people and institutions are immune from faulty logic and therefore are perfect decisions maker - Rational self-interest is not the same as selfishness Bina Nusantara University

The Economic Perspective Marginal Analysis : Benefits and Cost - The economic perspective focuses largely on marginal analysis- comparison of marginal benefits and marginal costs usually for dicisions making - In making choices rationally, the decision maker must compare those two amounts. - In a wolrd scarcity, the dicisions to obtain the marginal benefit ascociated with some spesific option always includes the marginal cost of forgoing something else Bina Nusantara University

Macroeconomics and Microeconomics Macroeconomics examines either the company as a whole or its basic subdivisions or aggregates, sucs as the government, household, and business sector Microeconomics is the part of economics concerned with individual unit such a person, a hosehold, a firm, or an industry Positive economics deals with factual statement (“what is”), normative economics involve value judgments (“what ought to be) Bina Nusantara University

Individual’s Economizing Problem Limited Income Unlimited Wants A Budget Line Attainable and Unattainable Combinations Tradeoffs & Opportunity Costs Choice Income Change Bina Nusantara University

Individuals’ Economizing Problem Because wants exceed incomes, individuals face an economizing problems; they must decide what to buy and what to forgo A Budget line (budget constrains) shows the various combinations of two goods that a consumer can purchase with a spesific money income straight line budget constarins imply constant opportunity cost asscociated weith obtaining more of either of the two goods Bina Nusantara University

Individuals’ Economizing Problem $120 Budget 12 10 8 6 4 2 DVDs $20 Books $10 Income = $120 Pdvd = $20 = 6 6 5 4 3 2 1 2 4 6 8 10 12 Quantity of DVDs Unattainable Income = $120 Pb = $10 = 12 Attainable 2 4 6 8 10 12 14 Bina Nusantara University Quantity of Books

Society’s Economizing Problem Scarce Resources Resource Categories Land Labor Capital Investment Entrepreneurial Ability Factors of Production Bina Nusantara University

Society’s Economizing Problem Economists catagories economics resources as land, labor, capital, and entrepreneurial ability The production possibilities curve illustrates several ideas : a. scarcity of resources b. choice among outputs c. opportunity cost d. the law of increasing opportunity cost A comparison of marginal benefits and marginal cost is needed to determine the best or optimal output mix on a production possibilities curve Bina Nusantara University

Production Possibilities Model Assume : Full Employment Fixed Resources Fixed Technology Two Goods Consumer Goods (Exp :Pizzas) Capital Goods (Exp : Industrial Robots) Bina Nusantara University

Production Possibilities Model Production Possibilities Table Production Alternatives Type of Product A B C D E Pizzas (in hundred thousands) 1 2 3 4 Industrial Robots (in thousands) 10 9 7 4 Bina Nusantara University Plot Points to Create Graph…

Production Possibilities Model A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ Unattainable A Economic Growth B C’ Industrial Robots C D’ D Now Attainable Attainable E E’ Bina Nusantara University 0 1 2 3 4 5 6 7 8 9 Pizzas

Production Possibilities Model Production Possibilities Curve A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ Unattainable A B C’ Law of Increasing Opportunity Cost C Industrial Robots D’ Shape of the Curve D Attainable E E’ Bina Nusantara University 0 1 2 3 4 5 6 7 8 9 Pizzas

Production Possibilities Model Production Possibilities Curve A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ Unattainable C’ Industrial Robots U D’ Under or Unemployment 0 1 2 3 4 5 6 7 8 9 E’ Bina Nusantara University Pizzas

Production Possibilities Model Optimal Allocation of Resources a MC c 15 10 5 MB = MC e Marginal Benefit & Marginal Cost b d MB Bina Nusantara University 1 2 3 Quantity of Pizza

Unemployment, Growth, and the Future Unemployment causes an economy to operate at point inside its production possibilities curve Increases in resource supplies, improvements in resource quality, and technological advance cause economic growth, which is depicted as an outward shift of the production possibilities curve An economiy’s present choice of capital and consumer goods helps determine the fiture location of its production possibilities curve International specialization and trade enable a nation to obtain more goods than its production possibilities curve indicates Bina Nusantara University