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Limits, Alternatives, and Choices: Mcgraw-Hill/Irwin

Microeconomic Limits Alternatives and choices

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Wendors Wendors
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49 views17 pages

Limits, Alternatives, and Choices: Mcgraw-Hill/Irwin

Microeconomic Limits Alternatives and choices

Uploaded by

Wendors Wendors
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter 1:
Limits, Alternatives,
and Choices
Wants and Means
Economics is about wants and means:
Society has the resources to make goods
and services that satisfy our many desires.
However, our economic wants far exceed
the productive capacity of our limited
resources our resources are scarce.
Scarcity means that society has limited
resources and therefore cannot produce all
the goods and services people want.
LO: 1-1
1-2

The Economic
Perspective
Economics is the study of how people,
institutions, and society make choices under
conditions of scarcity.
An economic perspective or economic
way of thinking takes the following concepts
into consideration:
Scarcity and Choice
Purposeful Behavior
Marginalism: Benefits and Costs

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1-3
Scarcity and Choice
Scarce economic resources mean limited
goods and services.
When a good is produced, the resources
employed can no longer be used to make
another good.
We must decide what we will have and what we
must forgo.
Opportunity cost is the value of the good,
service, or time forgone to obtain something else.
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1-4
Purposeful Behavior
Economics assumes that individuals act rationally
and in their own self-interest.
Individual decisions are purposeful and seek to
maximize utility.
Consumers are purposeful in deciding what goods and services
to buy.
Business firms are purposeful in deciding what products to
produce and how.
Governmental entities are purposeful in deciding what services
to provide and how to finance them.
Utility is the pleasure, happiness, or satisfaction
obtained from consuming a good or service.
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1-5
Marginalism:
Benefits and Costs
Individuals make rational decisions such that the
marginal benefit exceeds (or equals) the marginal
cost.
In a world of scarcity, the decision to obtain the
marginal benefit associated with some specific option
always includes the marginal cost of forgoing
something else.
Marginal analysis is the comparison of marginal
(extra or additional) benefits and marginal
costs, usually for decision making.
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An Example:
Marginalism
Shopping for a new car
You find a standard model that you like but
you are considering additional features (a
sunroof, leather interior, heated seats and
alloy wheels). As long as the marginal
benefit (greater satisfaction) exceeds the
marginal cost (extra expenses) of the
additional features, you will add them.
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Economics Relies on
the Scientific Method
Observing real-world behavior and outcomes.
Formulating possible explanations of cause and effect
(hypothesis).
Testing hypothesis by comparing predicted and actual
outcomes.
Accepting, rejecting, or modifying hypothesis.
Continuing the process.

Hypotheses Theories Laws and principles Models

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1-8
Economic Principles
Economic principles are statements about
economic behavior or the economy that enable
prediction of the probable effects of certain actions.
They serve as tools for ascertaining cause and
effect (or action and outcome) within the economic
system:
Purposeful simplifications simplify complex reality
Generalizations make statements about typical or
average consumers, workers, or business firms
Ceteris paribus (Other things equal) all variables except those
under consideration are held constant
Graphical expression many models are expressed graphically
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1-9
Microeconomics and
Macroeconomics
Microeconomics studies individual
decision-making units, such as a consumer,
a worker, or a business firm.
Macroeconomics studies economy as a
whole or its aggregates.
Aggregate is a collection of specific economic
units treated as if there were one unit.
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1-10
An Economic Problem
Both individuals and society face an
economic problem.
An economic problem is the need to make
choices because wants exceed means.
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1-11
An Individuals
Economic Problem
Limited income (from
wages, interest, rent,
profit) forces people to
choose what to buy and
what to forgo.
Can be represented
by a budget line
Unlimited wants
means individuals have
to evaluate their
marginal benefits and
marginal costs to make
choices that maximize
their satisfaction
Two types of wants:
Necessities (food,
shelter, clothing, health
care)
Luxuries (jewelry,
electronics, private art
collections)

A Budget line shows
various combinations of
two products a consumer
can purchase with a
specific money income,
given the products prices.
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1-12
A Budget Line
6
5
4
3
2
1
0
0
2
4
6
8
10
12
DVDs
$20
Books
$10
12

10

8

6

4

2

0
2 4 6 8 10 12 14
$120 Budget
Income = $120
P
dvd
= $20
= 6
Income = $120
P
b
= $10
= 12
Attainable
Unattainable
Quantity of Paperback Books
Q
u
a
n
t
i
t
y

o
f

D
V
D
s

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1-13
Societys
Economic Problem
Scarce economic
resources (also called
factors of production,
or inputs):
Land
Labor
Capital
Entrepreneurial
ability

Many ways to use
limited resources:
Goods
Services
Private services
Government services
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1-14
A Production
Possibilities Model
Assumptions
Full employment economy is employing all
of its available resources (simplification)
Fixed resources - the quantity and quality of
production are fixed (ceteris paribus)
Fixed technology the methods used to
produce output are fixed (ceteris paribus)
Two goods (simplification)
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Type of Product
Pizzas
(in hundred thousands)
Industrial Robots
(in thousands)
Production Alternatives
A B C D E
10 9 7 4 0
0 1 2 3 4
Plot Points to Create Graph
A Production
Possibilities Table
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1-16
A
Pizzas
I
n
d
u
s
t
r
i
a
l

R
o
b
o
t
s

Attainable
0 1 2 3 4 5 6 7 8 9

12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
B
C
D
E
A Production
Possibilities Curve
LO: 1-5
1-17

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