1. 01 Limits, Alternatives, and Choices
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. Economic wants exceed productive capacity
Introduction
Economic wants exceed productive capacity
Economics: A social science concerned with making optimal choices under conditions of scarcity
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3. 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
Humans and property resources are scarce (limited) so goods and services have to be limited. “We can’t have it all”. The core of economics says “There’s no free lunch”. It means that there was land use involved, farm labor, the labor of cooks and waiters, and management.
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4. Opportunity Cost
The goods and services that could have been produced but are sacrificed is called opportunity cost.
That “free lunch” is at the expense of other crops, other farm laborers, etc.
To get more of one thing, you forgo the opportunity of getting something else.
That “something else” you could have gotten may or may not have been more valuable economically than the “free lunch” you’re getting right now.

5. Marginalism
Marginal analysis: comparisons of marginal benefits and marginal costs
Marginal means “extra” or “additional”
Every option involves marginal benefits and marginal costs (because of scarce resources)
Should you attend school for another year or not?
Should the government increase its funding for a missile defense system?
Should a business expand or reduce its output?

6. Microeconomics and Macroeconomics
Microeconomics: Decision making by individual units
Macroeconomics: Examines either the economy as a whole or its basic subdivisions or aggregates (collection of specific economic units being treated as one unit
The government
Household sectors
Business sectors
Millions of consumers get lumped together and just called “consumers”
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7. Macro vs. Micro

8. Positive and Normative Economics
Positive economics: Deals with economic facts and cause-and-effect relationships
Theoretical economics
Normative economics: A subjective perspective of the economy
Value judgments about what the economy should be like or what policies should be enacted to achieve a desirable goal
Theoretical economics – descriptions, theory development and theory testing. Avoids value judgments, establishes scientific statements about economics behavior.
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9. Examples
Positive economics statement: “The unemployment rate in several European nations is higher than that in the US”
Normative economics statement: “European nations ought to undertake policies to reduce their unemployment rates”
Most economists disagree with each other when speaking in normative economics terms (“we could do this” or “they should do this”)

10. Pitfalls to Sound Economic Reasoning
Biases
Some people think corporate profits are excessive
Some people think that more government regulation is better than less regulation
Loaded terminology
Tabloid journalism
Fallacy of composition
“What is true for one individual is true for the whole”
Post hoc fallacy
“A comes before B so A must have caused B”
Correlation not causation
People are biased. End of story.
Think about tabloid journalism and how they use phrases like “high profits are obscene” or “low wages are exploitive”.
The fallacy of composition is an assumption that is NOT CORRECT. It is NOT necessarily true for one individual’s truth to be the whole group’s truth.
DO NOT FALL FOR THE POST HOC FALLACY! IT IS NOT ALWAYS TRUE!!
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11. 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
Introduction to Chapter 2 ^^ (don’t freak out, I just need to show you this to get you started)
Attainable and unattainable options are things like “I can buy this apple” versus “I cannot possibly pay for a Lamborghini”. Opportunity costs are those sacrifices where “to get more of one thing you have to forgo the opportunity to get something else”
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12. Individual’s Economizing Problem12 10 8 6 4 2
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
This graph shows the difference in opportunity costs of DVD’s vs. paperback books. This is just a random example of an individual’s economizing problem (think microeconomics).
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13. Society’s Economizing Problem
Scarce resources
Land
Labor
Capital
Entrepreneurial Ability (takes initiatives, makes decisions, innovates, and takes risks)
This is a much more broad example of macroeconomics and scarcity working together.
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14. Production Possibilities Model
Illustrates production choices
Assumptions
Full employment
Fixed resources
Fixed technology
Two goods
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15. 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…
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16. Production Possibilities Model14 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
Pizzas
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17. A Growing Economy Economic Growth Now Attainable Unattainable14 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’
Pizzas
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18. 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
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