1. 1 Limits, Alternatives, and Choices
This chapter introduces many of the fundamental concepts in economics and we cover a wide variety of concepts. We start with the definition of economics then we will discuss the economic perspective. Then the discussion moves to the development of economic theory. The individual’s and society’s economizing problems are discussed using a budget line and production possibilities curves to address these problems. Economic growth is addressed and in the last word we will discuss common mistakes students make when thinking about economics.
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Economic wants exceed productive capacity.
Introduction
Economics defined:
Economic wants exceed productive capacity.
Use resources efficiently to maximize fulfillment of unlimited wants.
If wants didn’t exceed our productive capacity everyone could have everything that they ever wanted and this class wouldn’t exist.
Since we can’t get everything that we want, we have to make choices. The choices that we make are the best options available given the circumstances.
Every choice that is made has an impact on the economy. Being in this class right now impacts the economy.
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3. The Economic Perspective
Key features:
Scarcity and choice
Purposeful Behavior
Marginal Analysis
The economics perspective is essentially the lens that economists use to view the world. This lens includes three parts.
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4. Scarcity and Choice Resources are scarce Choices must be made
Opportunity cost
There’s no free lunch
If resources weren’t scarce, we wouldn’t have to make choices.
Since we have to make choices, there is a cost to every choice and that’s called opportunity cost. This is where the phrase, “There’s no such thing as a free lunch” comes from.
What did you give up to be in this class? What would you be doing if you weren’t in class right now?
It’s important to note, that everyone’s opportunity cost will be different.
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5. Rational self-interest Utility Desired outcomes Selfless good deed
Purposeful Behavior
Rational self-interest
Utility
Desired outcomes
Selfless good deed
Individuals and businesses make rational decisions – decisions that at the time appear to be beneficial.
Every choice made, provides some kind of utility. With rational self-interest, the goal is to maximize utility at the end of the day. This does not mean that we are completely selfish or that we can’t make wrong decisions. We get utility when we help others and often when we make decisions we don’t have all of the information, so wrong decisions can be made.
Firms are rational because they try to maximize their profits.
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6. Compare marginal benefit and marginal cost Marginal means “extra”
Marginal Analysis
Compare marginal benefit and marginal cost
Marginal means “extra”
Every time we make a choice, we are weighing the marginal benefit and cost. We will choose to do something if the marginal benefit is greater than the marginal cost because that is rational and will help to maximize utility.
If a person says, “That’s not worth it.” Then in “economic-speak” they are saying that the marginal cost is greater than the marginal benefit.
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7. Theories, Principles, and Models
Economic principles and theories
Generalizations, so imprecise
Ceteris Paribus: Other-things-equal assumption
Statements of economic behavior supported by facts
Based on the scientific method, economic principles and theories are created.
Economic principles are generalizations about economic behavior that are true for the average person. This means that the principles are imprecise, but they are still relevant. It is impossible to create principles that are true for every individual.
The other-things-equal assumption is the ceteris paribus assumption which is common in many sciences.
In economics graphs are often used to illustrate the relationship between variables.
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8. Microeconomics and Macroeconomics
Decision making by individual units
Macroeconomics
Aggregate, total
Economic speak
In microeconomics specific types of industries, or certain types of individuals are examined
In macroeconomics, the entire economy is examined. Macroeconomics looks at the basic subdivisions of the economy like government, households, businesses, and international trade.
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9. Positive and Normative Economics
Positive economics
Deals with economic facts
Normative economics
Subjective perspective of economy
Positive economics can be supported or disproved with data. There isn’t any subjectivity.
Normative economics is what “ought to be.” It is a standard or a norm for the economy to achieve. This is subjective since everybody has different opinions about what is acceptable.
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10. Society’s Economizing Problem
Scarce resources – inputs used to produce other goods and services
Land – natural resources
Labor – most workers
Capital – manufactured inputs
Not money
Investment – spending on production & accumulation of capital
For the economy as a whole the economizing problem exists because resources are scarce, not income.
Resources refers to inputs that are used in the production of other goods and services.
Land refers to all natural resources.
Labor refers to most people who work and therefore contribute to the production of a good or service.
Capital refers to all manufactured inputs. Capital is not the same as money. Money isn’t even considered a resource.
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11. Society’s Economizing Problem
Entrepreneurial ability
Takes initiative
Decision maker
Innovator
Takes risk
Key to economic growth
Make sure that you don’t confuse a successful businessperson with an entrepreneur. Someone can be a successful businessperson and make quite a bit of money, but that doesn’t necessarily mean that he/she is an entrepreneur.
Can anyone think of a person who would be considered an entrepreneur?
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12. Production Possibilities Model
Shows maximum combinations of 2 goods that can be produced when the economy is efficient.
Assumptions:
Full employment
Fixed resources
Fixed technology
Two goods
The production possibilities model shows the maximum combinations of two goods that can be produced with the resources available today.
Full-employment means that we are using all available resources and they are being used to their potential.
Using two goods is a simplification. You will still see the concepts shown by the PPC without making it any more complicated. Often times, the two goods are general categories of two goods rather than specific goods, so that it shows the tradeoff between choosing those goods.
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13. Production Possibilities Table
Production Alternatives
Type of Product A B C D E
Pizzas
(in hundred thousands) 1 2 3 4
The production possibilities table shows the combinations of pizzas and robots that can be produced with the resources available. At point A, the economy can produce 10,000 robots by using all of the resources to produce robots.
At point B, the economy is able to produce 100,000 pizzas, but they have to give up some robots to get these pizzas since some resources are re-allocated to producing pizzas instead of robots.
As the economy continues to move towards point E, the number of pizzas increase while the number of robots decreases illustrating the opportunity cost of more pizzas is lost robots.
Industrial Robots
(in thousands) 10 9 7 4
Plot Points to Create Graph…
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14. Improved resource quality Technological advances
A Growing Economy
Economic Growth
More resources
Improved resource quality
Technological advances
An economy grows when there are more resources and/or better resources available. With more resources available, the economy can produce more total goods and services.
When resources are better, it means that the economy can use fewer resources to produce the same output thereby freeing some resources to increase the output of other goods and increasing the total goods and services produced.
Improvements in technology also enable the economy to produce a larger amount of goods and services with fewer resources and allows a greater output of all goods and services.
It is also possible to have a shrinking economy if any of the above change in the opposite direction.
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15. Increased production possibilities
International Trade
Specialization
Increased production possibilities
International trade enables countries to specialize in the production of goods which they produce more efficiently than other countries. With international trade, resources are allocated more efficiently and it essentially is the equivalent of an increase in resources. Now a country can not only use its own resources, but it can also take advantage of foreign resources through trade. This leads to a rightward shift of the production possibilities curve.
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