macroeconomic mcgrowhill macroeconomic mcgrowhill macro ch 1 19e use this one

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

The Economic Perspective

•
•

Thinking like an economist
Key features:

•
•
•

LO1

Scarcity and choice
Purposeful behavior
Marginal analysis

1-3


Scarcity and Choice

•
•
•

Resources are scarce
Choices must be made
Opportunity cost

•

LO1

There’s no free lunch

1-4


Purposeful Behavior

•
•
•
•

LO1

Rational self-interest
Individuals and utility
Firms and profit
Desired outcomes

1-5


Marginal Analysis

LO1

•
•
•

Marginal benefit

•

Comparison between marginal
benefit and marginal cost

Marginal cost
Marginal means change or
“extra”

1-6


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

•

Economic principles

•
•
•
LO2

Generalizations
Other-things-equal assumption
Graphical expression
1-7


•

Microeconomics and
Macroeconomics
Microeconomics

•
•

Macroeconomics

•

LO3

Decision making by individual
units

Aggregate

1-8


Positive and Normative Economics

•

Positive economics

•
•

Normative economics

•

LO3

Deals with economic facts

A subjective perspective of
the economy

1-9


Individual’s Economizing Problem

•
•
•

Limited income
Unlimited wants
A budget line

•
•
•
•
LO4

Attainable and unattainable options
Tradeoffs and opportunity costs
Make the best choice possible

Change in income
1-10


Individual’s Economizing Problem
$120 Budget

12

DVDs Books
$20
$10

10
Income = $120
Quantity of DVDs

60
52
44
36
28
110
012

Pdvd = $20

8

Unattainable

6

Income = $120
= 12
Pb = $10

4
2
0

=6

Attainable

2

4

6

8

10

12

Quantity of Paperback Books

LO4

14
1-11


Global Perspective

LO4

1-12


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


Society’s Economizing Problem

•

Scarce resources (Factors of
Production)

•
•
•
•
LO4

Land
Labor
Capital
Entrepreneurial Ability
1-14

Society’s Economizing Problem

•

Entrepreneurial ability

•
•
•
•
LO4

Takes initiative
Makes decisions
Innovates
Takes risk

1-15


The Market System

Five Fundamental Questions
Chapter Objectives
Economic Perspect
ive
Theories Principl
es and Models
Macro and Microec
onomics

Individual’s Econo
mizing Problem
Society’s Economiz
ing Problem
Production Possibil
ities Model
Unemployment, Grow
th, and the Future
Last Word

• Who Will Get the Output?
• How Will the System
Accommodate Change?
• How Will the System
Promote Progress?
–Technological Advance
–Creative Destruction
–Capital Accumulation

Key Terms
End Show
1-16

Copyright 2008 The McGraw-Hill Companies


The Market System

The “Invisible Hand”
Chapter Objectives

Economic Perspect
ive
Theories Principl
es and Models
Macro and Microec
onomics
Individual’s Econo
mizing Problem
Society’s Economiz
ing Problem
Production Possibil
ities Model
Unemployment, Grow
th, and the Future
Last Word

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

Key Terms
End Show
1-17

Copyright 2008 The McGraw-Hill Companies


The Market System

Demise of Command Systems
Chapter Objectives
Economic Perspect
ive
Theories Principl
es and Models
Macro and Microec
onomics
Individual’s Econo
mizing Problem
Society’s Economiz
ing Problem
Production Possibil
ities Model
Unemployment, Grow
th, and the Future
Last Word

USSR

East Germany
Yugoslavia

• Two Insurmountable
Problems

–The Coordination
Problem
–The Incentive Problem

Key Terms
End Show
1-18

Copyright 2008 The McGraw-Hill Companies


Economic Efficiency
• Allocative
Chapter Objectives
Economic Perspect
ive
Theories Principl
es and Models
Macro and Microec
onomics
Individual’s Econo
mizing Problem
Society’s Economiz
ing Problem
Production Possibil
ities Model
Unemployment, Grow
th, and the Future
Last Word

Efficiency – Producing
what society wants
Marginal Benefit = Marginal Cost

•Productive Efficiency – Producing at
lowest cost
Lowest Average Total Cost

Key Terms
End Show
1-19

Copyright 2008 The McGraw-Hill Companies


Production Possibilities Model

•
•

Illustrates production choices
Assumptions:

•
•
•
•
LO5

Full employment
Fixed resources
Fixed technology
Two goods
1-20

Production Possibilities Table
Production Alternatives
Type of Product

Pizzas

A

B

C

D

E

0

1

2

3

4

10

9

7

4

0

(in hundred thousands)

Industrial Robots
(in thousands)

Plot the Points to Create the Graph…

LO5

1-21


Industrial Robots

Production Possibilities Curve
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

Unattainable

C

D

U

Attainable
E
0

1

2

3

4

5

6

7

8 9

Pizzas
LO5

1-22


Marginal Benefit & Marginal Cost

Optimal Allocation
MC
15

c
MB = MC

e
10

5

0

LO5

a

b

d
MB

1

2
Quantity of Pizza

3

1-23


A Growing Economy

•

Economic Growth

•
•
•

LO6

More resources
Improved resource quality
Technological advances

1-24


A Growing Economy
Production Alternatives
Type of Product

Pizzas

A'

B'

C'

D'

E'

0

2

4

6

8

14

12

9

5

0

(in hundred thousands)

Industrial Robots
(in thousands)

LO6

1-25