01

Limits, Alternatives, and

Choices

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Introduction

LO1

Economics defined

Economic wants exceed

productive capacity

A social science concerned

with making optimal choices
under conditions of scarcity

1-2

Economics
An inquiry into the nature and causes of
the wealth of nations. (Adam Smith)
Economics is a study of man in the
ordinary business of life. It enquires how he
gets his income and how he uses it. Thus, it
is on the one side, the study of wealth and
on the other and more important side, a
part of the study of man. (Alfred Marshall)

The Economic Perspective

Scarcity and Choice
Resources
are scarce
Choices must be made
Opportunity cost
Theres no free lunch

LO1

1-4

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

Economic principles
Generalizations
Other-things-equal assumption
Graphical expression
1-5

LO3

Microeconomics and
Macroeconomics

Microeconomics
Decision making by individual units such as
people, individuals business units.
I.E Price of a specific Product
Macroeconomics
Examines either the economy as a whole or its
basic subdivisions or aggregates
Such as total output, total
employement/unemployement, total expenditure.
I.E Govt. decision making

1-6

Positive and Normative Economics

Positive economics

Deals with economic facts, cause and

effect relationship.

Includes description theory, development

and testing.

Normative economics

LO3

A subjective perspective of the economy

Value judgment of economy such as what
particular policy action is recommended to
achieve a desired goal.

1-7

Individuals Economizing Problem

LO4

Limited income
Unlimited wants
A budget line
Attainable and unattainable
options
Trade-offs and opportunity costs
Make the best choice possible
Change in income
1-8

Individuals Economizing Problem

12

DVDs Books
$20
$10

10

6
0
5
2
4
4
3
6
2
8
1 10
0 12

Quantity of DVDs

$120 Budget

Income = $120
=6
Pdvd = $20

Unattainable

Income = $120
= 12
Pb = $10

4
2
0

Attainable

10

12

Quantity of Paperback Books

LO4

14

1-9

Societys Economizing Problem

LO4

Resources are always

SCARCE
Scarce resources
Land (All natural resources
used in production process.)
Labor (Physical and mental
talent used in production
process)
1-10

Societys Economizing Problem

Cont.
Capital
(All
manufactured aid used

LO4

in production process such as

storage, transpiration)
Entrepreneurial Ability
(They are distinct from labor.
Combine resources from Land,
Labor, and Capital to produce
goods)
Takes initiatives, makes decisions,
innovates, and takes risks)

1-11

Production Possibilities Model

LO5

Illustrates production choices

Assumptions
Full employment
Fixed resources
Fixed technology
Two goods

1-12

Production Possibilities Model

Production Alternatives
Type of Product

Pizzas

10

(in hundred thousands)

Industrial Robots
(in thousands)

Plot the Points to Create the Graph

LO5

1-13

Industrial Robots

Production Possibilities Model

14
13
12
11
10
9
8
7
6
5
4
3
2
1

The law of
increasing
opportunity
costs makes
the PPC
concave.

A
B
C

Unattainable

Attainable
E
0

Pizzas
LO5

1-14

Industrial Robots

A Growing Economy
14
13
12
11
10
9
8
7
6
5
4
3
2
1

A
B

Unattainable

A
B

C
C

Economic
Growth
D

Now Attainable

Attainable

E
0

Pizzas
LO6

1-15

The End

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