Chap001

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Chap001

  1. 1. Limits, Alternatives, and Choices Chapter 1 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. Chapter Objectives <ul><li>Economics defined </li></ul><ul><li>Role of economic theory </li></ul><ul><li>Microeconomics vs. macroeconomics </li></ul><ul><li>Resource scarcity and the economizing problem </li></ul><ul><li>Production possibilities model </li></ul>1-
  3. 3. Economics Defined <ul><li>Economic wants exceed productive capacity </li></ul><ul><li>Social science concerned with making optimal choices under conditions of scarcity </li></ul>1-
  4. 4. The Economic Perspective <ul><li>Thinking like an economist </li></ul><ul><li>Key features : </li></ul><ul><ul><li>Scarcity and choice </li></ul></ul><ul><ul><li>Purposeful behavior </li></ul></ul><ul><ul><li>Marginal analysis </li></ul></ul>1-
  5. 5. Scarcity and Choice <ul><li>Resources are scarce </li></ul><ul><li>Choices must be made </li></ul><ul><li>There is no free lunch </li></ul><ul><li>Opportunity cost </li></ul>1-
  6. 6. Purposeful Behavior <ul><li>Rational self-interest </li></ul><ul><li>Individuals and utility </li></ul><ul><li>Firms and profit </li></ul><ul><li>Desired outcomes </li></ul>1-
  7. 7. Marginal Analysis <ul><li>Marginal benefit </li></ul><ul><li>Marginal cost </li></ul><ul><li>Marginal means extra </li></ul><ul><li>Comparison of marginal benefit and marginal cost </li></ul>1-
  8. 8. Economic Models <ul><li>The scientific method </li></ul><ul><li>Cause and effect </li></ul><ul><li>Economic principles </li></ul><ul><li>Simplification of reality </li></ul><ul><li>Other-things-equal assumption </li></ul><ul><li>Graphical expression </li></ul>1-
  9. 9. Macro vs. Micro <ul><li>Macroeconomics </li></ul><ul><ul><li>Aggregate </li></ul></ul><ul><li>Microeconomics </li></ul><ul><ul><li>Individual Units </li></ul></ul><ul><li>Positive Economics </li></ul><ul><li>Normative Economics </li></ul>1-
  10. 10. Individual’s Economizing Problem <ul><li>Limited income </li></ul><ul><li>Unlimited wants </li></ul><ul><li>A budget line </li></ul><ul><li>Tradeoffs & opportunity costs </li></ul><ul><li>Make best choice possible </li></ul><ul><li>Change in income </li></ul>1-
  11. 11. A Budget Line 6 5 4 3 2 1 0 0 2 4 6 8 10 12 DVDs $20 Books $10 12 10 8 6 4 2 0 2 4 6 8 10 12 14 $120 Budget Attainable Unattainable Quantity of Paperback Books Quantity of DVDs 1- Income = $120 P dvd = $20 = 6 Income = $120 P b = $10 = 12
  12. 12. Society’s Economizing Problem <ul><li>Scarce resources </li></ul><ul><ul><li>Land </li></ul></ul><ul><ul><li>Labor </li></ul></ul><ul><ul><li>Capital </li></ul></ul><ul><ul><li>Entrepreneurial Ability </li></ul></ul><ul><li>Factors of production </li></ul>1-
  13. 13. Production Possibilities Model <ul><li>Illustrate production choices </li></ul><ul><li>Assumptions: </li></ul><ul><ul><li>Full employment </li></ul></ul><ul><ul><li>Fixed resources </li></ul></ul><ul><ul><li>Fixed technology </li></ul></ul><ul><ul><li>Two goods </li></ul></ul>1-
  14. 14. 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 Points to Create Graph… Production Possibilities Table 1-
  15. 15. Production Possibilities Curve 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’ 1-
  16. 16. Production Possibilities Curve 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 Law of Increasing Opportunity Cost A’ B’ C’ D’ E’ Shape of the Curve 1-
  17. 17. Production Possibilities Curve Pizzas Industrial Robots Under or Unemployment 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 1-
  18. 18. The Future Economy <ul><li>Consequences of unemployment </li></ul><ul><li>Economic growth </li></ul><ul><ul><li>More resources </li></ul></ul><ul><ul><li>Better quality resources </li></ul></ul><ul><ul><li>Technological advances </li></ul></ul>1-
  19. 19. 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 1-
  20. 20. International Trade <ul><li>Production point </li></ul><ul><li>Consumption point </li></ul><ul><li>Specialization </li></ul><ul><li>Preview </li></ul>1-
  21. 21. Optimal Allocation of Resources 15 10 5 0 1 2 3 a b c d e MB = MC MC MB Quantity of Pizza Marginal Benefit & Marginal Cost 1-
  22. 22. LAST Word: Pitfalls to Sound Economic Reasoning <ul><li>Biases </li></ul><ul><li>Loaded terminology </li></ul><ul><li>Fallacy of composition </li></ul><ul><li>Post hoc fallacy </li></ul><ul><li>Correlation but not causation </li></ul>1-
  23. 23. Key Terms <ul><li>economics </li></ul><ul><li>economic perspective </li></ul><ul><li>opportunity cost </li></ul><ul><li>utility </li></ul><ul><li>marginal analysis </li></ul><ul><li>scientific method </li></ul><ul><li>economic principle </li></ul><ul><li>other-things-equal assumption </li></ul><ul><li>macroeconomics </li></ul><ul><li>aggregate </li></ul><ul><li>microeconomics </li></ul><ul><li>positive economics </li></ul><ul><li>normative economics </li></ul><ul><li>economizing problem </li></ul><ul><li>budget line </li></ul><ul><li>economic resources </li></ul><ul><li>land </li></ul><ul><li>labor </li></ul><ul><li>capital </li></ul><ul><li>investment </li></ul><ul><li>entrepreneurial ability </li></ul><ul><li>factors of production </li></ul><ul><li>consumer goods </li></ul><ul><li>capital goods </li></ul><ul><li>production possibilities curve </li></ul><ul><li>law of increasing opportunity costs </li></ul><ul><li>economic growth </li></ul>1-
  24. 24. The Market System and the Circular Flow 1-
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