After reading this chapter, you should be able to: Define economics and the features of the economic perspective, describe the role of economic theory in economics, distinguish microeconomics from macroeconomics and positive economics from normative economics, list the categories of scarce resources and delineate the nature of the economizing problem. | 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Introduction Economics defined Economic wants exceed productive capacity A social science concerned with making optimal choices under conditions of scarcity LO1 1- 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- Theories, Principles, and Models The scientific method Economic principles Generalizations Other-things-equal assumption Graphical expression Observe Formulate a hypothesis Test the hypothesis Accept, reject, or modify the hypothesis Continue to test the hypothesis, if necessary LO2 1- 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- Positive and Normative Economics Positive economics Deals with economic facts Normative economics A subjective perspective of the economy LO3 1- 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- Individual’s Economizing Problem 6 5 4 3 2 1 0 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 Pdvd = $20 = 6 Income = $120 Pb = $10 = 12 Attainable Unattainable LO4 1- Society’s Economizing Problem Scarce resources Land Labor Capital Entrepreneurial Ability (takes initiatives, makes decisions, innovates, and takes risks) LO4 1- Production Possibilities Model Illustrates production choices Assumptions Full employment Fixed resources Fixed technology Two goods LO5 1- Type of Product Pizzas (in hundred thousands) Industrial Robots (in thousands) Production Alternatives A B C D E 10 9 7 4 0 0 1 2 3 4 Plot the Points to Create the Graph Production Possibilities Model LO5 1- The law of increasing opportunity costs makes the PPC concave. Production Possibilities Model LO5 1- 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 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- 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 Compare Two Hypothetical Economies LO6 1- Pitfalls to Sound Economic Reasoning Biases Loaded terminology Fallacy of composition Post hoc fallacy Correlation not causation 1-
