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1 Limits, Alternatives, and Choices
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Chapter Objectives Economics Defined Role of Economic Theory
Economic Perspective Role of Economic Theory Microeconomics and Macroeconomics Scarce Resources The Economizing Problem Production Possibilities O 1.1
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The Economic Perspective
Scarcity and Choice Opportunity Cost Purposeful Behavior Utility Marginal Analysis Marginal Benefits Marginal Costs O 1.2 O 1.3
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Theories Principles and Models
The Scientific Method Economic Principle Generalizations Other-Things-Equal Assumption (ceteris paribus) Graphical Expression O 1.4
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Macro and Microeconomics
Macroeconomics Aggregate Microeconomics Individual Units Positive Economics Normative Economics
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Individual’s Economizing Problem
Limited Income Unlimited Wants A Budget Line Attainable and Unattainable Combinations Tradeoffs & Opportunity Costs Choice Income Change O 1.5 W 1.1
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Individual’s Economizing Problem
GLOBAL PERSPECTIVE Average Income, Selected Nations Country Per Capita Income 2004 Switzerland United States Japan France South Korea Mexico Brazil China Pakistan Nigeria Rwanda Liberia $48,230 41,400 37,180 30,090 13,980 6,770 3,090 1,290 600 390 220 110 Source: World Bank
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Individual’s Economizing Problem
$120 Budget 12 10 8 6 4 2 DVDs $20 Books $10 6 5 4 3 2 1 2 4 6 8 10 12 Income = $120 Pdvd = $20 = 6 Unattainable Quantity of DVDs Income = $120 Pb = $10 = 12 Attainable Quantity of Books
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Society’s Economizing Problem
Scarce Resources Resource Categories Land Labor Capital Investment Entrepreneurial Ability Factors of Production
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Production Possibilities Model
Full Employment Fixed Resources Fixed Technology Two Goods Consumer Goods (Pizzas) Capital Goods (Industrial Robots)
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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 Plot Points to Create Graph…
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Production Possibilities Model
Production Possibilities Curve A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 G 1.1 B’ Unattainable A Economic Growth B C’ C Industrial Robots D’ D Now Attainable Attainable E E’ Pizzas
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Production Possibilities Model
Production Possibilities Curve A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ Unattainable A Law of Increasing Opportunity Cost B C’ C Industrial Robots D’ Shape of the Curve D Attainable W 1.2 E E’ Pizzas
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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 E’ Pizzas
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Production Possibilities Model
Optimal Allocation of Resources MC a c 15 10 5 MB = MC e Marginal Benefit & Marginal Cost b d MB Quantity of Pizza
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Unemployment Growth and the Future
A Growing Economy Economic Growth Increasing Resource Supplies Increasing Resource Quality Technological Advances
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Present Choices & Future Possibilities
G 1.2 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 Implications of International Trade
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Pitfalls to Sound Economic Reasoning
Last Word Biases Loaded Terminology Fallacy of Composition Post Hoc Fallacy Correlation but not Causation
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Key Terms economics economic perspective opportunity cost utility
marginal analysis scientific method economic principle other-things-equal assumption macroeconomics aggregate microeconomics positive economics normative economics economizing problem budget line economic resources land labor capital investment entrepreneurial ability factors of production consumer goods capital goods production possibilities curve law of increasing opportunity costs economic growth
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The Market System and the Circular Flow
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