Chapter 1: Limits, Alternatives and Choices

What is economics? Economics: the social science concerned with

decisions made due to scarcity

Allocative decisions

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What is economics? (Productive) Resources Land Labor Capital

(investment)

Entrepreneurial ability

Organize resources Innovate ( I (new goods & services) d i ) Bear risk Incentive =
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The Economic Perspective (how economists view social phenomena) 1. Scarcity requires choices Resources are scarce !!! TANSTAAFL Trade-offs Opportunity Costs: The value of

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The Economic Perspective (how economists view social phenomena) 2. Rational (self-interested) behavior People act in their own self interest People maximize their own happiness

People maximize their utility Firms maximize profit

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The Economic Perspective (how economists view social phenomena) 3. Cost-benefit analysis Marginal analysis: comparing marginal (additional) costs & marginal benefits when making decisions Economic Decision Rule:
o o o

do more if d m do less if stop when

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Economic Methodology Economics is a social science Scientific method: Form hypotheses Test with data Reject/dont reject Leads to: Theories about how things work g Widely accepted theories become principles or laws

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Economic Methodology Models

o

Simplified representations of how things work

Built on assumptions: o Principles/laws p o Simplifications/abstractions/generalizations

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Two Important Distinctions 1. Macroeconomics vs. Microeconomics

Macroeconom cs Macroeconomics:

Economy as a whole The big picture

Microeconomics:

Focus on individual units Households, consumers, firms, etc. Govt policy toward these units

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Two Important Distinctions 2. Positive vs. Normative Economics

Positive:

Normative:

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Public Policy & Economics Economics deals with incentives

Public Policy

Incentives (predictable) Social Outcomes

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Economic Goals

Income Equality

Efficiency

CHOICES INVOLVE TRADE-OFFS Public policy: Positive economics Normative economics Economic Freedom Clean Environment

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The Economizing Problem

Individuals Budget Constraint (BC) Example:

$60/mo. toward cell phone minutes & coffees Pm = $0.10/minute; Pc = $3

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The Economizing Problem

Individuals Budget Constraint (BC) Example: $60/mo. Pm = $0.10/minute;

Pc = $3

Graphically:
Cell minutes

Cups of Coffee
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The Economizing Problem

What is the opp cost of 1 more coffee?

Cell minutes

Cups of Coffee
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The Economizing Problem

Society Production Possibilities Curve (PPC) Assume:

Fixed resources & technology Produce 2 goods g

Good Y

Bowed outward =

Increase X

Give up this much Y - Opp cost of increase in X

Good X
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The Economizing Problem

PPC examples:

Guns vs. butter Capital goods vs. Consumption goods

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