01 Limits, Alternatives, and Choices Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Economic wants exceed productive capacity Introduction Economics defined Economic wants exceed productive capacity A social science concerned with making optimal choices under conditions of scarcity LO1 1-2

The Economic Perspective Scarcity and Choice Purposeful Behavior Marginal Analysis Resources are scarce Rational self-interest Marginal benefit Choices must be made Individuals and utility Marginal cost Opportunity cost Firms and profit Marginal means extra There’s no free lunch Desired outcomes MB and MC LO1 1-3

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 1-4

Microeconomics and Macroeconomics Decision making by individual units Macroeconomics Examines either the economy as a whole or its basic subdivisions or aggregates LO3 1-5

Positive and Normative Economics Positive economics Deals with economic facts Normative economics A subjective perspective of the economy LO3 1-6

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 1-7

Individual’s Economizing Problem 12 10 8 6 4 2 2 4 6 8 10 12 14 Quantity of Paperback Books Quantity of DVDs 6 5 4 3 2 1 8 10 12 DVDs $20 Books $10 $120 Budget Income = $120 Pdvd = $20 = 6 Pb = $10 = 12 Attainable Unattainable LO4 1-8

Society’s Economizing Problem Scarce resources Land Labor Capital Entrepreneurial Ability (takes initiatives, makes decisions, innovates, and takes risks) LO4 1-9

Production Possibilities Model Illustrates production choices Assumptions Full employment Fixed resources Fixed technology Two goods LO5 1-10

Production Possibilities Model 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 Plot the Points to Create the Graph… LO5 1-11

Production Possibilities Model 14 13 12 11 10 9 8 7 6 5 4 3 2 1 The law of increasing opportunity costs makes the PPC concave. A B Unattainable C Industrial Robots U D Attainable E 0 1 2 3 4 5 6 7 8 9 Pizzas LO5 1-12

A Growing Economy Economic Growth Now Attainable Unattainable 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ Unattainable A Economic Growth B C’ C Industrial Robots D’ D Now Attainable Attainable E E’ 0 1 2 3 4 5 6 7 8 9 Pizzas LO6 1-13

Present Choices, Future Possibilities Compare Two Hypothetical Economies Future Curve Future Curve F Goods for the Future Goods for the Future P Current Curve Current Curve Goods for the Present Goods for the Present Presentville Futureville LO6 1-14

Pitfalls to Sound Economic Reasoning Biases Loaded terminology Fallacy of composition Post hoc fallacy Correlation not causation 1-15