Chapter 1. Limits, Alternatives, Choices

Chapter 1Limits, Alternatives, ChoicesCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.EconomicsEconomics A social science concerned with making optimal choices under conditions of scarcityEconomic wants exceed society’s productive capacityLO1The Economic PerspectiveEconomic perspectiveScarcity and choiceOpportunity costPurposeful behavior to increase utilityMarginal analysisLO1Scarcity and ChoiceResources are scarceChoices must be madeOpportunity costThere’s no free lunchLO1Purposeful BehaviorRational self-interestIndividuals and utilityFirms and profitDesired outcomeLO1Marginal AnalysisMarginal benefitMarginal costMarginal means “extra”Comparison between marginal benefit and marginal costLO1Theories, Principles, and ModelsThe scientific methodObserveFormulate a hypothesisTest the hypothesisAccept, reject, or modify the hypothesisContinue to test the hypothesis, if necessaryLO2Micro and MacroMicroeconomics The study of the individual consumer, firm, or marketMacroeconomicsThe study of the entire economy or a major aggregate of the economyLO3The Economizing ProblemThe economizing problemLimited income and unlimited wantsThe budget lineAttainable and unattainable combinationsTrade-offs and opportunity costsLO4Society’s Economizing Problem4 categories of economic resourcesLandLaborCapitalInvestmentEntrepreneurial abilityLO5Production Possibilities ModelEconomic model that shows different combinations of two goods that an economy can produceFull employmentFixed resourcesFixed technology2-good economyConsumer goods and capital goodsLO6Increasing Opportunity CostsLaw of increasing opportunity costsAs more of a particular good is produced, its marginal opportunity costs increaseProduction possibilities curveConcave shapeEconomic rationaleLO6Unemployment, Growth, & the FutureEconomic growthPizzasIndustrial robotsAttainable0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1UnattainableABCDENow attainableA’B’C’D’E’LO7Present Choices, Future PossibilitiesGoods for the presentGoods for the futureGoods for the futureGoods for the presentPFCurrentcurveCurrentcurveFutureCurveFutureCurvePresentvilleFuturevilleLO7Pitfalls to Sound Economic ReasoningBiasesLoaded terminologyFallacy of compositionPost hoc fallacyCorrelation not causation