1. Limits, Alternatives, and Choices
Chapter 1
Limits, Alternatives, and Choices
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2. Basics
Scarcity is the condition in which human wants are always greater than the available supply of time, goods, and resources.
Economics is the study of making optimal choices under conditions of scarcity (in order to satisfy unlimited wants).
A theory of “constrained decision-making”
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3. Macro vs. Micro
Microeconomics: decision-making by individual units such as a person, a household, or a firm.
Macroeconomics: studies the economy as a whole (in aggregate)
ECO 211

4. Positive vs. Normative
Positive Economics: a theory of what the economy is actually like – no value judgments.
Normative Economics: a theory about what the economy should be or ought to be like – a value judgment.
We’ll focus on Positive Economics theories.
ECO 211

5. Two More Basic Economics Concepts
Opportunity Cost: the full cost of not choosing the next best alternative
Marginal Analysis: comparing the benefit from one additional good (marginal benefit – MB) against the cost of one additional good (marginal cost – MC)
Optimal choice when MB = MC
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6. Individual’s Economizing Problem
Basic Economic Problem for an individual: How to choose goods and services to maximize satisfaction with limited income and time.
In Economics language: How to choose goods to maximize utility given budget and time constraints.
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7. ECO 211

8. Two Hazards of Economic Thinking
Failing to understand the ceteris paribus assumption.
Confusing association (or correlation) with causation.
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9. Ceteris Paribus
Ceteris paribus: “all other things remain unchanged” (pronounced Kayteris)
If the ceteris paribus assumption is not satisfied, then we cannot legitimately test a theory.
ECO 211

10. Confusing association with causation
Two variables are associated (or correlated) with each other if they share any simple relationship - nothing more.
Examples: household spending and income tend to increase or decrease at the same time; in the summer, ice cream sales and crime rates both increase.
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11. Confusing association with causation
Causation means that one event causes another.
Examples: An increase in income usually causes an increase in household spending; in the summer, an increase in ice cream sales causes the crime rate to increase???
ECO 211