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
Purposeful Behavior
Rational self-interest
Utility
Desired outcomes
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. Microeconomics and Macroeconomics
Decision making by individual units
Macroeconomics
Aggregate, total
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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7. The Economic Perspective
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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8. 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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9. 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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10. Positive and Normative Economics
Positive economics – “what is”
Economic statements that are factual
Scientific-based analysis
Normative economics – “what ought to be”
Economic statements that involve value judgments
Positive economics can be supported or disproved with data. There isn’t any subjectivity.
Normative economics is what “ought to be.” This is subjective since everybody has different opinions about what is desirable.
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11. The Economizing Problem
Limited income and unlimited wants
The budget line
Attainable and unattainable combinations
Trade-offs and opportunity costs
The individual’s economizing problem exists because of the combination of a limited income and unlimited wants.
A budget line is used to illustrate the greatest combinations of two goods that can be purchased with a certain amount of income. It reflects the greatest amount of these two goods that can be purchased.
A budget line is created for a specific level of income so that when income changes, the budget line will shift to show the higher or lower incomes.
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12. The Consumer’s Budget Line12 10 8 6 4 2
The Budget Line: Combinations of DVDs and Books Attainable with $120
Units of DVDs
(Price = $20)
Units of Books
(Price=$10)
Total Expenditure 6
$120 5 2 4 3 8 1 10 12
Income = $120
Pdvd = $20
= 6
Pb = $10
= 12
Attainable
Unattainable
Any combination of goods inside the budget line can be purchased, but that combination of goods is not representative of the maximum that could be purchased. Since the blue budget line represents the maximum of goods that can be purchased, any point outside (to the right) of the budget line represents a combination whose price exceeds the available income and therefore can’t be purchased. A budget line clearly illustrates how much of one good must be sacrificed to get more of another good (opportunity costs).
If income increases, the budget line will shift to the right to show that now more books and DVDs can be purchased. If income falls, the budget line shifts to the left to show that fewer books and DVDs can be purchased.
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13. Society’s Economizing Problem
4 categories of economic resources
Land
Labor
Capital
Investment
Entrepreneurial ability
For the economy as a whole, the economizing problem exists because resources are scarce.
Resources refers to inputs that are used in the production of other goods and services.
Land refers to all natural resources.
Labor is one of the human resources and refers to all physical and mental talents used in the production of a good or service.
Capital refers to anything man-made and used to produce goods and services. Capital is an investment good; it is not the same as money. Money isn’t even considered a resource.
Entrepreneurs are another type of human resource but is different from labor mainly because entrepreneurs are risk-takers.
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14. 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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15. 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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