Limits, Alternatives,

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Limits, Alternatives, Choices

• Chapter 1

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Overview of Chapter 1

• Definition of economics and the features of the
  economic perspective
• Role of economic theory in economics
• Distinction between Micro and Macro
• Categories of scarce resources nature of
  economizing problem
• Production possibilities

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1.1 The Economic Perspective

• Economics social science concerned with how
  individual, institution, and society make optimal
  choices under conditions of scarcity.
• Features of Economic Perspective
• Scarcity and Choice scarcity restricts options
  and demands choice making.
• Opportunity costs to obtain more of 1 thing,
  society forges the opportunity of getting the
  next best thing.
• Purposeful Behavior rational behavior
  optimizing utility
• Marginal Analysis Benefits and Costs
  decision-making on the margin (additional,
  extra, or change in a situation)

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1.2 Theories, Principles, and Models

• Economists employ the scientific method
• Observation
• Formulation of a hypotheses
• Testing the hypotheses
• Accepting, Rejecting, Modifying the hypotheses
• Evolution of accepted hypotheses into a theory,
  then into a principle, combined with other
  principles and theories, into models used for
  representations of how things work
• Other things to know
• Generalizations
• Ceteris paribus
• Graphs

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1.3 Macro and Micro

• Macroeconomics examines the economy either as a
  whole or in major aggregate units.
• Microeconomics examines the economy in
  individual units analysis of individual consumer
  behavior, individual business decision-making or
  small groups of economic decision-making

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1.3 Macro and Micro

• Positive Economics focuses on facts and
  cause-and-effect relationships. (what is)
• Normative Economics incorporates value judgments
  about what the economy should be like. (what
  ought to be)

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1.4 Economizing Problem

• Economizing Problem Making choices because
  economic wants exceed economic means.
• Limited income vs. Unlimited wants
• The Budget Line a graphic presentation of
  decision-making of 2 products a consumer wants
  given a specific money income.
• See Figure 1.1 in your chapter

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Figure 1.1 Consumer BL
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1.4 Economizing Problem

• Attainable and Unattainable Combinations
• Trade-offs and opportunity costs
• Choice
• Income changes

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1.5 Societys Economizing Problem

• Scarce Resources all natural, human and
  manufactured resources used in the production of
  goods and services.
• Resource Categories (Factors of Production)
• Land
• Labor
• Capital
• Entrepreneurial ability

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1.6 Production Possibilities Model

• Assumptions of the PPC
• Full employment
• Fixed resources
• Fixed technology
• Two goods consumer and capital
• See Table 1.1

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Table 1.1 PP combinations
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1.6 Production Possibilities Model

• Production Possibility Curve graphic
  representation of data (See Figure 1.2)
• Each point on the curve represents a maximum
  output of the 2 goods
• The curve is a constraint because it shows the
  limit of attainable outputs.
• Points inside the curve are also attainable but
  not as desired

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1.6 Production Possibilities Model

• Law of Increasing Opportunity Cost as the
  production of a particular good increases, the
  opportunity cost of producing an additional unit
  rises.
• Shape of the PPC demonstrates gaining more of
  one good, necessitates losing increasingly more
  of another
• Economic Rationale for Law of Increasing
  Opportunity Costs not all resources are
  substitutes for one another

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1.6 Production Possibilities Model

• Optimal Allocation which combination on the PPC
  is best? This requires MC, MB analysis.
• See Figure 1.3

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Figure 1.3 MBBC
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1.7 Unemployment, Growth, and the Future

• See Figures 1.4 and 1.5
• Increases in resource supplies
• Advances in technology
• Improvements in resource quality
• Present Choices vs. Future Possibilities
• See Figure 1.6
• International Trade

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Chapter 1 Review

• Define economics and the features of the economic
  perspective.
• How is economic theory in economics developed?
• What is the distinction between Micro and Macro?
• Define the categories of scarce resources the
  nature of economizing problem
• Explain the MBMC position when making a decision
• Describe the Production Possibilities Curve and
  its implications for decision-making