Limits, Alternatives, and Choices

1. 1 Limits, Alternatives, and Choices

2. O 1.1 Chapter Objectives • Economics Defined • Economic Perspective • Role of Economic Theory • Microeconomics and Macroeconomics • Scarce Resources • The Economizing Problem • Production Possibilities

3. O 1.2 O 1.3 The Economic Perspective • Scarcity and Choice • Opportunity Cost • Purposeful Behavior • Utility • Marginal Analysis • Marginal Benefits • Marginal Costs

4. O 1.4 Theories Principles and Models • The Scientific Method • Economic Principle • Generalizations • Other-Things-Equal Assumption (ceteris paribus) • Graphical Expression

5. Macro and Microeconomics • Macroeconomics • Aggregate • Microeconomics • Individual Units • Positive Economics • Normative Economics

6. O 1.5 W 1.1 Individual’s Economizing Problem • Limited Income • Unlimited Wants • A Budget Line • Attainable and Unattainable Combinations • Tradeoffs & Opportunity Costs • Choice • Income Change

7. GLOBAL PERSPECTIVE Individual’s Economizing Problem Average Income, Selected Nations Country Per Capita Income 2004 $48,230 41,400 37,180 30,090 13,980 6,770 3,090 1,290 600 390 220 110 Switzerland United States Japan France South Korea Mexico Brazil China Pakistan Nigeria Rwanda Liberia Source: World Bank

8. Income = $120 Income = $120 = 12 = 6 Pb= $10 Pdvd= $20 Individual’s Economizing Problem $120 Budget 12 10 8 6 4 2 0 DVDs $20 Books $10 6 5 4 3 2 1 0 0 2 4 6 8 10 12 Unattainable Quantity of DVDs Attainable 2 4 6 8 10 12 14 Quantity of Books

9. Society’s Economizing Problem • Scarce Resources • Resource Categories • Land • Labor • Capital • Investment • Entrepreneurial Ability • Factors of Production

10. Production Possibilities Model • Full Employment • Fixed Resources • Fixed Technology • Two Goods • Consumer Goods (Pizzas) • Capital Goods (Industrial Robots)

11. Production Possibilities Model Production Possibilities Table Production Alternatives A B C D E Type of Product Pizzas (in hundred thousands) 0 1 2 3 4 Industrial Robots (in thousands) 10 9 7 4 0 Plot Points to Create Graph…

12. G 1.1 Production Possibilities Model Production Possibilities Curve A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ Unattainable A Economic Growth B C’ C Industrial Robots D’ D Now Attainable Attainable E’ E 0 1 2 3 4 5 6 7 8 9 Pizzas

13. W 1.2 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 E’ E 0 1 2 3 4 5 6 7 8 9 Pizzas

14. 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’ 0 1 2 3 4 5 6 7 8 9 Pizzas

15. Production Possibilities Model Optimal Allocation of Resources MC a c 15 10 5 0 MB = MC e Marginal Benefit & Marginal Cost b d MB 1 2 3 Quantity of Pizza

16. Unemployment Growth and the Future • A Growing Economy • Economic Growth • Increasing Resource Supplies • Increasing Resource Quality • Technological Advances

17. G 1.2 Present Choices & Future Possibilities 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

18. Pitfalls to Sound Economic Reasoning Last Word • Biases • Loaded Terminology • Fallacy of Composition • Post Hoc Fallacy • Correlation but not Causation

19. 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 Key Terms

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