Lecture Macroeconomics (19/e) - Chapter 1: Limits, alternatives, and choices

01
Limits, Alternatives, and Choices

McGraw­Hill/Irwin

        Copyright © 2012 by The McGraw­Hill Companies, Inc. All rights reserved.


Introduction

LO1

•
•

Economics defined

•

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

Economic wants exceed
productive capacity

1-2


The Economic Perspective

LO1

Scarcity and
Choice

Purposeful
Behavior

Marginal
Analysis

• Resources
are scarce

• Rational
• Marginal
self-interest benefit

• Choices must • Individuals
be made
and utility

• Marginal cost

• Opportunity
cost

• Firms and
profit

• Marginal
means extra

• There’s no
free lunch

• Desired
outcomes

• MB and MC

1-3


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
1-4


Microeconomics and Macroeconomics

•
•
•
•

LO3

Microeconomics
Decision making by individual
units
Macroeconomics
Examines either the economy as
a whole or its basic subdivisions
or aggregates

1-5

Positive and Normative Economics

•
•
•
•

LO3

Positive economics
Deals with economic facts
Normative economics
A subjective perspective of the
economy

1-6


Individual’s 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
1-7


Individual’s Economizing Problem
DVDs Books
$20
$10

60
52
44
36
28
110
012

12
10
Quantity of DVDs

$120 Budget

Income = $120
Pdvd = $20

8

=6

Unattainable
6
Income = $120
= 12
Pb = $10

4
2
0

Attainable

2

4

6

8

10

12

Quantity of Paperback Books

LO4

14

1-8


Society’s Economizing Problem

•
•
•
•
•

LO4

Scarce resources
Land
Labor
Capital
Entrepreneurial Ability (takes
initiatives, makes decisions,
innovates, and takes risks)

1-9


Production Possibilities Model

•
•
•
•
•
•

LO5

Illustrates production choices
Assumptions
Full employment
Fixed resources
Fixed technology
Two goods

1-10


Production Possibilities Model
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

1-11


Industrial Robots

Production Possibilities Model
14
13
12
11
A
10
B
9
8
Unattainable
C
7
6
5
D
4
U
3
2 Attainable

E
1
0

1

2

3

4

5

6

7

The law of
increasing
opportunity
costs makes
the PPC
concave.
8 9

Pizzas
LO5

1-12

Industrial Robots

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

A’
B’

Unattainable

A
B

Economic
Growth

C’
C

D’
D

Now Attainable

Attainable

E’

E
0

1

2

3

4

5

6

7

8 9

Pizzas
LO6

1-13


Present Choices, Future Possibilities

Future
Curve

Current
Curve

P

Goods for the Present

Presentville
LO6

Goods for the Future

Goods for the Future

Compare Two Hypothetical Economies
Future
Curve

F

Current
Curve

Goods for the Present

Futureville
1-14


Pitfalls to Sound Economic Reasoning

•
•
•
•
•

Biases
Loaded terminology
Fallacy of composition
Post hoc fallacy
Correlation not causation

1-15