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01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Page 1: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

01

Limits, Alternatives, and Choices

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

Page 2: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO1

Introduction

• Economics defined:

• Economic wants exceed productive capacity.

• A social science concerned with making optimal choices under conditions of scarcity.

1-2

Page 3: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO1

The Economic Perspective

• Thinking like an economist

• Key features:

• Scarcity and choice

• Purposeful behavior

• Marginal analysis

1-3

Page 4: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO1

Scarcity and Choice

• Resources are scarce

• Choices must be made

• Opportunity cost

• There’s no free lunch

1-4

Page 5: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO1

Purposeful Behavior

• Rational self-interest

• Individuals and utility

• Firms and profit

• Desired outcomes

1-5

Page 6: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO1

Marginal Analysis

• Marginal benefit

• Marginal cost

• Marginal means change or “extra”

• Comparison between marginal benefit and marginal cost

1-6

Page 7: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO2

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

1-7

Page 8: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO3

Microeconomics and Macroeconomics

• Microeconomics

• Decision making by individual units

• Macroeconomics

• Aggregate

1-8

Page 9: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO3

Positive and Normative Economics

• Positive economics

• Deals with economic facts

• Normative economics

• A subjective perspective of the economy

1-9

Page 10: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO4

Individual’s Economizing Problem

• Limited income

• Unlimited wants

• A budget line

• Attainable and unattainable options

• Tradeoffs and opportunity costs

• Make the best choice possible

• Change in income1-10

Page 11: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO4

Individual’s Economizing Problem

6543210

02468

1012

DVDs$20

Books$10

$120 Budget 12

10

8

6

4

2

02 4 6 8 10 12 14Quantity of Paperback Books

Qu

anti

ty o

f D

VD

s

Income = $120

Pdvd = $20= 6

Income = $120

Pb = $10= 12

Attainable

Unattainable

1-11

Page 12: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO4

Global Perspective

1-12

Page 13: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Almost half the world — over three billion people — live on less than $2.50 a day.

Page 14: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO4

Society’s Economizing Problem

• Scarce resources (Factors of Production)

• Land

• Labor

• Capital

• Entrepreneurial Ability

1-14

Page 15: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO4

Society’s Economizing Problem

• Entrepreneurial ability

• Takes initiative

• Makes decisions

• Innovates

• Takes risk

1-15

Page 16: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Copyright 2008 The McGraw-Hill Companies1-16

Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word

Key Terms

End Show

The Market System

• Who Will Get the Output?

• How Will the System Accommodate Change?

• How Will the System Promote Progress?–Technological Advance–Creative Destruction–Capital Accumulation

Five Fundamental Questions

Page 17: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Copyright 2008 The McGraw-Hill Companies1-17

Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word

Key Terms

End Show

The Market System

• 1776 Wealth of Nations by Adam Smith–Efficiency–Incentives–Freedom

The “Invisible Hand”

Page 18: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Copyright 2008 The McGraw-Hill Companies1-18

Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word

Key Terms

End Show

The Market System

• Two Insurmountable Problems–The Coordination

Problem–The Incentive Problem

Demise of Command Systems

USSR

Yugoslavia

East Germany

Page 19: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Copyright 2008 The McGraw-Hill Companies1-19

Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word

Key Terms

End Show

Economic Efficiency

• Allocative Efficiency – Producing what society wants

Marginal Benefit = Marginal Cost

•Productive Efficiency – Producing at lowest cost

Lowest Average Total Cost

Page 20: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO5

Production Possibilities Model

• Illustrates production choices

• Assumptions:

• Full employment

• Fixed resources

• Fixed technology

• Two goods

1-20

Page 21: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO5

Production Possibilities Table

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…

1-21

Page 22: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO5

Production Possibilities Curve

Pizzas

Ind

ust

rial

Ro

bo

ts

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

AB

C

D

E

U

The law of increasing opportunity costs makes the PPC concave.

1-22

Page 23: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Optimal Allocation

LO5

a

b

c

d

e

MB = MC

MC

MB

15

10

5

01 2 3

Quantity of Pizza

Mar

gin

al B

enef

it &

Mar

gin

al C

ost

1-23

Page 24: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO6

A Growing Economy

• Economic Growth

• More resources

• Improved resource quality

• Technological advances

1-24

Page 25: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Type of Product

Pizzas (in hundred thousands)

Industrial Robots (in thousands)

Production Alternatives

A' B' C' D' E'

14 12 9 5 0

0 2 4 6 8

A Growing Economy

LO6 1-25

Page 26: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO6

A Growing Economy

Pizzas

Ind

ust

rial

Ro

bo

ts

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

AB

C

D

E

EconomicGrowth

Now Attainable

A’

B’

C’

D’

E’

1-26

Page 27: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO6

Present Choices, Future Possibilities

Goods for the Present

Goo

ds f

or t

he F

utur

e

Goo

ds f

or t

he F

utur

e

Goods for the Present

P

F

CurrentCurve

CurrentCurve

FutureCurve

FutureCurve

Presentville Futureville

1-27

Page 28: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

LO6

International Trade

• Specialization

• Increased production possibilities

1-28

Page 29: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Pitfalls to Sound Economic Reasoning

• Biases

• Loaded terminology

• Fallacy of composition

• Post hoc fallacy

• Correlation not causation

1-29

Page 30: 01 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Copyright 2008 The McGraw-Hill Companies1-30

Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word

Key Terms

End Show

Key Terms• economics• economic perspective• opportunity cost• utility• marginal analysis• scientific method• economic principle• other-things-equal as

sumption• 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


4 1 Irwin/McGraw Hill

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McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill

12-1 McGraw-Hill/Irwin

Irwin/McGraw Hill The McGraw-Hill Companies, Inc., 2000 · Slides by Matthew Will Chapter 2 Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 2000. Irwin/McGraw Hill ... " Tools

McGraw-Hill/Irwin McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

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© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved

1 McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Seven McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc.,

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill

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Chapter Ten LocalMarketing in Emerging Markets Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,,

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Local Marketing in Mature Markets Chapter Eight. Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,,

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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