1. 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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

3. The Economic Perspective Scarcity and Choice Purposeful Behavior Marginal Analysis Resources are scarce Rational self-interest Marginal benefit Choices must be made Individuals and utility Marginal cost Opportunity cost Firms and profit Marginal means extra There’s no free lunch Desired outcomes MB and MC LO1 1-3

4. 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 LO2 1-4

5. Microeconomics and Macroeconomics Microeconomics Decision making by individual units Macroeconomics Examines either the economy as a whole or its basic subdivisions or aggregates LO3 1-5

6. Positive and Normative Economics Positive economics Deals with economic facts Normative economics A subjective perspective of the economy LO3 1-6

7. Individual’s Economizing 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 LO4 1-7

8. 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 LO4 1-8

9. Society’s Economizing Problem Scarce resources Land Labor Capital Entrepreneurial Ability (takes initiatives, makes decisions, innovates, and takes risks) LO4 1-9

10. Production Possibilities Model Illustrates production choices Assumptions Full employment Fixed resources Fixed technology Two goods LO5 1-10

11. Type of Product Pizzas (in hundred thousands) Industrial Robots (in thousands) Production Alternatives ABCDE 109740 01234 Plot the Points to Create the Graph… Production Possibilities Model LO5 1-11

12. 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 U The law of increasing opportunity costs makes the PPC concave. Production Possibilities Model LO5 1-12

13. A Growing Economy 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 Economic Growth Now Attainable A’ B’ C’ D’ E’ LO6 1-13

14. 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 Compare Two Hypothetical Economies LO6 1-14

15. Pitfalls to Sound Economic Reasoning Biases Loaded terminology Fallacy of composition Post hoc fallacy Correlation not causation 1-15