1. # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Limits, Alternatives, and Choices 1

2. 1-2 LO1 Introduction Economics defined: Economic wants exceed productive capacity. A social science concerned with making optimal choices under conditions of scarcity.

3. 1-3 LO1 The Economic Perspective Thinking like an economist Key features: Scarcity and choice Purposeful behavior Marginal analysis

4. 1-4 LO1 Scarcity and Choice Resources are scarce Choices must be made Opportunity cost There’s no free lunch

5. 1-5 LO1 Purposeful Behavior Rational self-interest Individuals and utility Firms and profit Desired outcomes

6. 1-6 LO1 Marginal Analysis Marginal benefit Marginal cost Marginal means “extra” Comparison between marginal benefit and marginal cost

7. 1-7 LO2 Theories, Principles, and Models The scientific method: Economic principles Generalizations Other-things-equal assumption Graphical expression Observe Formulate a hypothesisTest the hypothesis Accept, reject, or modify the hypothesis Continue to test the hypothesis, if necessary

8. 1-8 LO3 Microeconomics and Macroeconomics Microeconomics Decision making by individual units Macroeconomics Aggregate

9. 1-9 LO4 Individual’s Economic 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

10. 1-10 LO4 Individual’s Economizing Problem 65432106543210 0 2 4 6 8 10 12 DVDs $20 Books $10 $120 Budget 12 10 8 6 4 2 0 2 4 6 8 10 12 14 Quantity of Paperback Books Quantity of DVDs Income = $120 P dvd = $20 = 6 Income = $120 P b = $10 = 12 Attainable Unattainable

11. 1-11 LO4 Global Snapshot Average Income, Selected Nations

12. 1-12 LO4 Society’s Economic Problem Scarce resources Land Labor Capital Entrepreneurial ability

13. 1-13 LO4 Society’s Economizing Problem Entrepreneurial ability Takes initiative Makes decisions Innovates Takes risk

14. 1-14 LO5 Production Possibilities Model Illustrates production choices Assumptions: Full employment Fixed resources Fixed technology Two goods

15. 1-15 LO5 Production Possibilities Table Type of Product Pizzas (in hundred thousands) Industrial Robots (in thousands) Production Alternatives ABCDE 109740 01234 Plot the Points to Create the Graph…

16. 1-16 LO5 Production Possibilities Curve Pizzas Industrial Robots Attainable 0 1 2 3 4 5 6 7 8 9 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C D E The law of increasing opportunity costs makes the PPC concave.

17. 1-17 Law of Increasing Opportunity Costs As production of a good increases, the opportunity cost of producing an additional unit rises. LO5

18. 1-18 Optimal Allocation LO5 a b c d e MB = MC MC MB 15 10 5 0 1 2 3 Quantity of Pizza Marginal Benefit & Marginal Cost

19. 1-19 Unemployment, Growth, and the Future Unemployment limits how much can be produced Production will be at a point inside the PPC Moving toward full employment will increase output

20. 1-20 LO6 A Growing Economy Economic growth More resources Improved resource quality Technological advances

21. 1-21 Type of Product Food products (hundred thousands) Manufacturing equipment (thousands) Production Alternatives A'A'B'C'D'E' 1412950 02468 A Growing Economy LO6

22. 1-22 LO6 A Growing Economy Food Products (hundred thousands) Manufacturing Equipment (thousands) 0 1 2 3 4 5 6 7 8 9 14 13 12 11 10 9 8 7 6 5 4 3 2 1 A B C D E A' B' C' D' E'

23. 1-23 LO6 Present Choices, Future Possibilities Goods for the Present Goods for the Future Goods for the Present P F Current Curve Current Curve Future Curve Future Curve Presentville Futureville