CHAPTER 1 LIMITS, ALTERNATIVES, AND CHOICES

1. Part One: An Introduction to Economics and the Economy CHAPTER 1LIMITS, ALTERNATIVES, AND CHOICES

2. In this chapter you will learn: 1.1 The Ten Key Concepts to retain for a lifetime 1.2 The features of the economic way of thinking 1.3 The role of economic theory in economics 1.4 The distinction between microeconomics and macroeconomics 1.5 The nature of the economic problem and the categories of scarce resources 1.6 About production possibilities analysis, increasing opportunity costs, and economic growth Chapter 1

3. Ten Key Concepts The Individual • Facing Tradeoffs • Opportunity Costs • Choosing a Little More or Less • The Influence of Incentives Chapter 1.1

4. Ten Key Concepts Interaction Among Individuals • Specialization and Trade • The Effectiveness of Markets • The Role of Governments Chapter 1.1

5. Ten Key Concepts The Economy as a Whole and the Standard of Living • Production and the Standard of Living • Money and Inflation • Inflation-Unemployment Tradeoff Chapter 1.1

6. The Economic Way of Thinking • Scarcity and Choice • Purposeful Behaviour • Marginal Analysis: Benefits and Costs Chapter 1.2

7. Theories, Principles, and Models The scientific method: • observe the world • formulate hypotheses • test by comparing actual outcomes to the hypothesized predictions • accept, reject, or modify hypotheses as indicated • continue testing against the facts • theory or model • law or principle Chapter 1.3

8. Theories, Principles, and Models Deriving Theories: • Terminology • Generalizations • Other-Things-Equal Assumption • Abstractions • Graphical Expression Chapter 1.3

9. Macroeconomics and Microeconomics • Macroeconomics examines: • the whole economy • the subdivisions or aggregates • Microeconomics examines: • individual units ( a household, firm, or industry) and their decision-making process Chapter 1.4

10. Positive and Normative Economics POSITIVE STATEMENTS… • based upon facts and cause-and-effect relationships • what is • without value judgments NORMATIVE STATEMENTS… • based upon subjective beliefs • what ought to be Predictions are positive if they are based on what future facts will be Chapter 1.4

11. The Individual’s Economic Problem • We all have a finite amount of income • Most people have unlimited wants • A consumer’s budget line Illustrated... Chapter 1.5

12. Figure 1-1A Consumer’s Budget Line Unattainable Attainable Chapter 1.5

13. Society’s Economic Problem:Scarce Resources Property Resources: • Land • Capital Human Resources: • Labour • Entrepreneurial Ability: • takes initiative • makes policy decisions • innovates • bears risk Chapter 1.6

14. The Production Possibilities Model Assumptions: • full employment and productive efficiency • fixed resources • fixed technology • two goods • pizzas symbolize consumer goods • industrial robots symbolize capital goods Chapter 1.7

15. The Production Possibilities Curve Chapter 1.7

16. Production Possibilities Curve The Production Possibilities Curve Chapter 1.7

17. attainable The Production Possibilities Curve Figure 1-2 A B C W attainable but inefficient unattainable D E Chapter 1.7

18. The Production Possibilities Curve Law of Increasing Opportunity Cost • Opportunity cost increases with amount produced • As we make more pizzas, the number of robots we have to give up (per pizza) increases Illustrated... Chapter 1.7

19. opportunity cost of 1st 100,000 pizzas = 1,000 robots opportunity cost of 2nd 100,000 pizzas = 2,000 robots opportunity cost of 3rd 100,000 pizzas = 3,000 robots opportunity cost of 4th 100,000 pizzas = 4,000 robots The Law of Increasing Opportunity Cost The more pizzas we make, the more each one costs in terms of machines foregone Chapter 1.7

20. The Law of Increasing Opportunity Cost Shape of the Curve • As we make more pizzas, the number of robots we have to give up (per pizza) increases • Slope of the production possibilities curve gets steeper and steeper Chapter 1.7

21. Additional pizza unit costs 1, 2, 3, 4 robot unit The Law of Increasing Opportunity Cost A B C The more pizza we make, the more machines we give up, the steeper the curve D E Chapter 1.7

22. The Law of Increasing Opportunity Cost Shape of the Curve • concave to the origin Economic Rationale • resources are not completely adaptable to alternative uses Chapter 1.7

23. Optimal Allocation • Decide on optimal allocation by comparing Marginal (extra) Cost (MC) to Marginal Benefit (MB) • Marginal Benefit is the extra benefit associated with consuming one more unit • Marginal Cost is the extra opportunity cost of that extra unit Chapter 1.7

24. Figure 1-3Optimal Allocation: MB = MC b c MC Optimal allocation requires the expansion of a good’s output until its MC and MB are equal e MB=MC MB a b Chapter 1.7

25. Unemployment, Growth, and the Future • A Growing Economy • increases in factor supplies • advances in technology Chapter 1.8

26. Figure 1-5 Economic Growth and the Production Possibilities Curve A’ B’ C’ D’ E’ Chapter 1.8

27. Future Curve Future Curve Figure 1-6Present Choices and Future Possibilities FAVOURING PRESENT GOODS FAVOURING FUTURE GOODS Goods for the Future Goods for the Future Goods for the Present Goods for the Present Chapter 1.8

28. A Qualification: International Trade • An individual nation is limited by the production possibilities curve • But NOT when there is international specialization and trade! • possible to consume ABOVE the production possibilities curve Chapter 1.8

29. Chapter Summary • 1.1 Ten Key Concepts to Retain for a Lifetime • 1.2 The Economic Way of Thinking • 1.3 Theories, Principles, and Models • 1.4 Macroeconomics and Microeconomics • 1.5 The Individual’s Economic Problem • 1.6 Society’s Economic Problem • 1.7 The Production Possibilities Model • 1.8 Unemployment, Growth, and the Future Chapter 1