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Chapter 1

Limits, Alternatives, and Choices

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Economics

  • Economics
    • A social science concerned with making optimal choices under conditions of scarcity
    • Economic wants exceed society’s productive capacity

LO1

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The Economic Perspective

  • Economic perspective
    • Scarcity and choice
    • Opportunity cost
    • Purposeful behavior to increase utility
    • Marginal analysis

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LO1

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Scarcity and Choice

  • Resources are scarce
  • Choices must be made
  • Opportunity cost
    • There’s no free lunch

LO1

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Purposeful Behavior

  • Rational self-interest
  • Individuals and utility
  • Firms and profit
  • Desired outcome

LO1

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Marginal Analysis

  • Marginal benefit
  • Marginal cost
  • Marginal means “extra”
  • Comparison between marginal benefit and marginal cost

LO1

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Theories, Principles, and Models

  • The scientific method

Observe

Formulate a hypothesis

Test the hypothesis

Accept, reject, or modify the hypothesis

Continue to test the hypothesis, if necessary

LO2

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Micro and Macro

  • Microeconomics
    • The study of the individual consumer, firm, or market
  • Macroeconomics
    • The study of the entire economy or a major aggregate of the economy

LO3

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The Economizing Problem

  • The economizing problem
  • Limited income and unlimited wants
  • The budget line
  • Attainable and unattainable combinations
  • Trade-offs and opportunity costs

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LO4

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Society’s Economizing Problem

  • 4 categories of economic resources
  • Land
  • Labor
  • Capital
    • Investment
  • Entrepreneurial ability

LO5

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Production Possibilities Model

  • Economic model that shows different combinations of two goods that an economy can produce
  • Full employment
  • Fixed resources
  • Fixed technology
  • 2-good economy
  • Consumer goods and capital goods

LO6

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Increasing Opportunity Costs

  • Law of increasing opportunity costs
    • As more of a particular good is produced, its marginal opportunity costs increase
  • Production possibilities curve
    • Concave shape
  • Economic rationale

LO6

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Unemployment, Growth, & the Future

  • Economic growth

Pizzas

Industrial robots

Attainable

0 1 2 3 4 5 6 7 8 9

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10

9

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3

2

1

Unattainable

A

B

C

D

E

Now attainable

A’

B’

C’

D’

E’

LO7

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Present Choices, Future Possibilities

Goods for the present

Goods for the future

Goods for the future

Goods for the present

P

F

Current

curve

Current

curve

Future

Curve

Future

Curve

Presentville

Futureville

LO7

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Pitfalls to Sound Economic Reasoning

  • Biases
  • Loaded terminology
  • Fallacy of composition
  • Post hoc fallacy
  • Correlation not causation

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