Lecture Essentials of economics (3/e): Chapter 1 - Brue, McConnell, Flynn

Chapter 1

Limits,
Alternatives, and
Choices

McGraw­Hill/Irwin

Copyright © 2014 by The McGraw­Hill Companies, Inc. All rights reserved.
1­1


Introduction

•

Economics defined:
• Economic wants exceed
productive capacity.
• A social science concerned
with making optimal choices
under conditions of scarcity.

1­2

LO1


The Economic Perspective

•

•

Thinking like an economist
Key features:
• Scarcity and choice
• Purposeful behavior
• Marginal analysis

1­3

LO1


Scarcity and Choice

•
•
•

Resources are scarce
Choices must be made
Opportunity cost
• There’s no free lunch

1­4

LO1


Purposeful Behavior

•
•
•
•

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

1­5

LO1


Marginal Analysis

•
•
•
•

Marginal benefit
Marginal cost
Marginal means “extra”
Comparison between marginal
benefit and marginal cost

1­6

LO1


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

LO2

Microeconomics and Macroeconomics

•
•

Microeconomics
• Decision making by individual
units
Macroeconomics
• Aggregate

1­8

LO3


Individual’s Economic Problem

•
•
•

•

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

Change in income
1­9

LO4


Individual’s Economizing Problem
$120 Budget

12

DVDs
$20

Books
$10

10

6
5
4
3
2
1
0

0
2
4

6
8
10
12

Quantity of DVDs

Income = $120

8

Pdvd = $20

Unattainable

6
4
2

=6

Income = $120
Pb = $10

Attainable

0
2

4

6

8

10

12

Quantity of Paperback Books
LO4

= 12

14
1­10


Global Snapshot
Average Income, Selected Nations

1­11

LO4


Society’s Economic Problem

•

Scarce resources
• Land
• Labor
• Capital
• Entrepreneurial ability

1­12

LO4


Society’s Economizing Problem

•

Entrepreneurial ability
• Takes initiative
• Makes decisions
• Innovates
• Takes risk

1­13

LO4


Production Possibilities Model

•
•

Illustrates production choices
Assumptions:
• Full employment
• Fixed resources
• Fixed technology
• Two goods
1­14

LO5


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…
1­15

LO5


Industrial Robots

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

A
B

Unattainable

C

D

Attainable
E
0

1

2

3

4

5

6

7

Pizzas
LO5

The law of
increasing
opportunity
costs makes
the PPC
concave.

8 9
1­16


Law of Increasing Opportunity Costs

• As production of a good increases,
the opportunity cost of producing an
additional unit rises.

1­17

LO5


Marginal Benefit & Marginal Cost

Optimal Allocation
MC
15

MB = MC

e
10

5

b
0

LO5

c

a

d
MB

1

2
Quantity of Pizza

3

1­18


Unemployment, Growth, and the 
Future

• Unemployment limits how much can
•
•

be produced
Production will be at a point inside the
PPC
Moving toward full employment will
increase output

1­19

A Growing Economy

•

Economic growth
• More resources
• Improved resource
quality
• Technological advances

1­20

LO6


A Growing Economy
Production Alternatives
Type of Product

Food products
(hundred thousands)

A'

B'

C'

D'

E'

0

2

4

6

8

12

9

5

0

Manufacturing equipment 14
(thousands)

1­21

LO6


Manufacturing Equipment (thousands)

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

A'
B'
A
B
C
D'
D

E'

E
0

LO6

C'

1

2

3

4

5

6

7

8 9

Food Products (hundred thousands)

1­22


Future
Curve

Current
Curve

P

Goods for the Present

Presentville

Goods for the Future

Goods for the Future

Present Choices, Future 
Possibilities

Future
Curve
F

Current
Curve

Goods for the Present

Futureville
1­23

LO6