Chapter 1 Limits, Alternatives and Choices

The Economic Perspective

Economic Perspective: A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions Economics: which is the social science concerned with how individuals, institutions and society make optimal choices under conditions of scarcity

Scarcity and Choice

Scarcity: restricts options and demands choices so we must decide what we will have and what we must forgo Scarce Inputs - Land - Equipment - Farm labor - Labor of cooks and waiters - Managerial talent Opportunity costs: The amount of other products that must be forgone or sacrificed to produce a unit of a product.

Purposeful Behavior
Rational self-interest pleasure, happiness or satisfactions from consuming/purposeful/rational

So Businesses are purposeful in deciding what goods to produce and buy

Marginal Analysis: Comparing Benefits and Costs

Marginal analysis: comparisons of marginal benefits and marginal costs, extra or addition - If marginal benefit is larger than marginal cost and you can afford, get it - If marginal cost is larger than marginal benefit, do not

Theories, Principles and Models

Scientific method: Observing real-world behavior and outcomes. Based on those observations, formulating a possible explanation of cause and effect (hypothesis). Testing this explanation by comparing the outcomes of specific events to the outcome predicted by the hypothesis. Accepting, rejecting, and modifying the hypothesis, based on these comparisons. Continuing to test the hypothesis against the facts. If favorable results accumulate, the hypothesis evolves into a theory. A very well-tested and widely accepted theory is referred to as an economic law or an Economic principle a statement about economic behavior or the economy that enables prediction of the probable effects of certain actions. Generalization Economic principles are expressed as the tendencies of typical or average consumers,
workers, or business firms.

Other-things-equal assumption (ceteris paribus) the assumption that factors other than those being considered
do not change

Graphical Expression Combinations of such laws or principles are incorporated into models, which are simplified representations of how something works, such as a market or segment of the economy. Simple, explain & predict, cause & effect

Microeconomics and Macroeconomics Microeconomics Part of economics concerned with decision making by individual customers, workers, households, and business firms Examples: price of a product, number of workers employed by a single firm, revenue or income of a household, etc Macroeconomics The economy as a whole or its basic subdivisions or aggregates
Aggregate: is a collection of specific economic units treated as if they were one unit seeks to obtain an overview, or general outline, of the structure of the economy and the relationships of its major aggregates

Postive and Normative Economics

Positive economics (What is) focuses on facts and cause-and-effect relationships. Includes description, theory development and theory testing, avoids judgements, establish scientific statements about economics behavior Normative economics (What it ought to be) incorporates judgments and what the econmy should be like, achieve a desirable goal

Individuals Economizing Problem

economizing problem then need to make choices because economic wants exceed economic means

Limited Income
Finite amount of income

Unlimited Wants
Gives us interest to economize: to pick and choose goods and services that max our satisfaction given the limited we face

A Budget Line
a schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income

Attainable and Unattainable Combinations Inside of the budget line and beyond the budget line Trades-Offs and Opportunity Costs Choice
evaluate your marginal benefits and marginal costs (here, product price) to make choices that maximize your satisfaction

Income Changes
An increase in money income shifts the budget line to the right; a decrease in money income shifts it to the left.

Society Economizing Problem Scare Resources

Economic resources: all natural, human, and manufactured resources that
go into the production of goods and services

Resource Categories

Landincludes all
natural resources (gifts of nature) used in the production process

Laborconsists of the physical actions and mental activities that people contribute to the production of goods and services Capitalall factory, storage, transportation, and distribution facilities, as well as tools and machinery investment to describe spending that pays for the production and accumulation of capital goods
Capital goods differ from consumer goods because consumer goods satisfy wants directly, whereas capital goods do so indirectly by aiding the production of consumer goods

Entrepreneurial Ability
The entrepreneur takes the initiative in combining the resources of land, labor, and capital to produce a good or a service - Takes initiative in combining resources to produce a good - Makes strategic business descions - Innovates - risks

Production Possibilities Model

Full employment The economy is employing all of its available resources. Fixed resources The quantity and quality of the factors of production are fixed. Fixed technology The state of technology (the methods used to produce output) is constant. Two goods The economy is producing only two goods: pizzas and industrial robots. Pizzas symbolize consumer goods , products that satisfy our wants directly; industrial robots (for example, the kind used to weld automobile frames) symbolize capital goods , products that satisfy our wants indirectly by making possible more efficient production of consumer goods. lists the different combinations of two products that can be produced with a specific set of resources, assuming full employment

Production Possibilities Table

Production Possibilities Curve

curve displays the different combinations of goods and services that society can produce in a fully employed economy, assuming a fixed availability of supplies of resources and fixed technology

Law of Increasing Opportunity Costs

As the production of a particular good increases, the opportunity cost of producing an additional unit rises. Economic Rationale The law of increasing opportunity costs is driven by the fact that economic resources are not completely adaptable to alternative uses.

Optimal Allocation
The optimal amount of the activity occurs where MB = MC

Unemployment, Growth, and the Future

A Growing Economy
Increases in Resource Supplies
resource supplies are fixed at any specific moment, they change over time

Pitfalls Biases Loaded terminology Fallacy of compostion: what is true for one individual or part of a whole is necessarily true for a group of indiciduals or the whole Post Hoc Fally or post boc or ergo propter boc: concluding that because event a precedes event b a is the cause of b Correlation but not causation:

Advances in Technology

Under international specialization and trade, each nation first specializes in the production of those items for which it has the lowest opportunity costs (due to an abundance of the necessary resources). International specialization and trade allow a nation to get more of a desired good at less sacrifice of some other good. Specialization and trade have the same effect as having more and better resources or discovering improved production techniques; both increase the quantities of capital and consumer goods available to society. Expansion of domestic production possibilities and international trade are two separate routes for obtaining greater output. economics: the social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity. economic perspective: a viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions. opportunity cost: the amount of other products that must be forgone or sacrificed to produce a unit of a product. utility: the want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service. marginal analysis: the comparison of marginal ("extra" or "additional") benefits and marginal costs, usually for decision making. scientific method: the procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation and testing of hypotheses to obtain theories, principles, and laws. economic principle: a widely accepted generalization about the economic behavior of individuals or institutions. other-things-equal assumption (ceteris paribus): the assumption that factors other than those being considered are held constant. macroeconomics: the part of economics concerned with the economy as a whole; with such major aggregates as the household, business, and government sectors; and with measures of the total economy aggregate: a collection of specific economic units treated as if they were one, for example, all prices of individual goods and services are combined into a price level, or all units of output are aggregated into gross domestic product. microeconomics: the part of economics concerned with decision making by individual units such as a household, a firm, or an industry and with individual markets, specific goods and services, and product resource prices. positive economics: the analysis of facts or data to establish scientific generalizations about economic behavior. normative economics: the part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.

Present Choices and Future Possibilities A Qualification: International Trade

economizing problem: the choices necessitated because society's economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited. budget line: a line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices. economic resources: the land, labor, capital, and entrepreneurial ability that are used in the production of goods and services; production agents; factors of production land: natural resources ("free gifts of nature") used to produce goods and services. labor: people's physical and mental talents and efforts that are used to help produce goods and services . capital: human-made resources (buildings, machinery, and equipment) used to produce goods and services; goods that do not directly satisfy human wants. investment: spending for the production and accumulation of capital and additions to inventories. entrepreneurial ability: the human resource that combines the other resources to produce a product, makes nonroutine decisions, innovates, and bears risks. consumer goods: products and services that satisfy human wants directly production possibilities curve: a curve showing the different combinations of goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed. law of increasing opportunity cost: the principle that as the production of a good increases, the opportunity cost of producing an additional unit rises. economic growth: an outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology. fallacy of composition: the false notion that what is true for the individual (or part) is necessarily true for the group (or whole) post hoc, ergo propter hoc fallacy: the false belief that when one event precedes another, the first event must have caused the second event