Limits, Alternatives, and Choices by G7TLu5x

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									Limits, Alternatives, and
         Choices

         CHAPTER 1
                   Introduction
                           2

 We begin the first chapter by defining the economic
  perspective or economic way of thinking
 The economic way of thinking involves several
  critical and closely related features…
                Scarcity and Choice
                            3

 We live in a world of scarce resources and unlimited
  wants and desires
 This is a concept economists define as scarcity
 Scarcity restricts options and demands choices be
  made
 At the core of economics is the idea that “There ain’t
  no such thing as a free lunch!”
                  Opportunity Cost
                             4

 There is a difference between “cost” and “price”
 The cost of a lunch may be free to you in terms of the
  price you pay for it…for instance, if I pick up the tab
 But, the lunch still has a cost…an opportunity
  cost…meaning that the resources that went to
  producing that lunch were no longer available to
  produce something else
                 Opportunity Cost
                           5

 Thus…the sacrifice of whatever other product could
  have been made using those resources is called the
  opportunity cost of the lunch
 To obtain more of one thing, society sacrifices the
  opportunity to have the next best thing
                  Purposeful Behavior
                                 6

 Economics assumes that human behavior reflects
 “rational self-interest”
     Humans seek to maximize the utility (satisfaction, happiness,
      pleasure, etc.) received from decisions they make and
      opportunities they pursue
     Because we consider costs and benefits when we make
      economic decisions, we call them “purposeful” or “rational”
     Self-interested behavior is designed to increase personal
      satisfaction
                    Marginal Analysis
                                  7

 The essence of marginal analysis is comparing
  marginal costs and marginal benefits when making
  decisions
     This is not restricted to only economic decisions but can be
      applied to many different types of decisions
 Economists define “marginal” as meaning “extra” or
  “additional” or “a change in”
 Most decisions we make involve small changes in
  the status quo
                  Marginal Analysis
                             8

 For some examples of the use of marginal analysis in
 some economic and non-economic ways, see Dwight
 Lee…
    It’s the Margin that Counts
    More on Marginalism
    Markets and Marginalism
    Marriages, Mistresses, and Marginalism
    Take This Job and Shove It, at the Margin
         Theories, Principles, and Models
                                 9

 Like the physical and life sciences, economics relies
  on the scientific method
     Observing real-world behavior and outcomes
     Formulating possible explanations of cause and effect based
      on the observations (hypotheses)
     Testing the hypotheses
     Accepting or rejecting the hypotheses and continuing to test
      them against the facts
     If the hypotheses hold up, they evolve into theories and,
      ultimately, principles and laws
       Theories, Principles, and Models
                           10

 Principles , theories, and laws eventually become
  incorporated into models, which are abstract or
  simplified representations of how something works
 Economic models are useful in analyzing and
  understanding economic behavior and how an
  economy operates
 They are tools for ascertaining cause and effect and
  are useful in making predictions
      Macroeconomics & Microeconomics
                               11

 We develop economic models at two levels:
   Microeconomics – which is concerned with decision making at
    the individual unit level of consumers and organizations
   Macroeconomics – which examines the entire economy or its
    major subdivisions
          Positive and Normative Analysis
                                 12

 Positive economics focuses on facts and cause and
 effect relationships and is objective
    It includes description, theory development, and theory testing
    It avoids value judgments
 Normative economics incorporates value judgments
 about what the economy should be like or ought to
 be like – it is subjective in nature
The Economizing Problem for an Individual
                               13

 Assumptions:
   Limited income

   Unlimited wants and desires

   The necessity to make choices
The Economizing Problem for an Individual
                                       14

                          12
 $120 Budget
 DVDs   Books             10
  $20    $10                                Income = $120
                                                             =6
  6       0                                    Pdvd = $20
                Quantity of DVDs
                                   8
  5       2                                       Unattainable
                                   6
  4       4
                                                            Income = $120
  3       6                        4
                                                               Pb = $10
                                                                            = 12

  2       8                        2   Attainable
  1      10
  0      12                        0
                                       2      4   6   8     10    12   14
                                       Quantity of Paperback Books
Global Perspective
        15
          Society’s Economizing Problem
                                 16

 Society must also make choices under conditions of
 scarcity
    If we want a larger military, can we have more hospitals and
     schools, also?
    Perhaps…but there is something that we will have to make
     do with less of if we decide we want both
                  Resource Categories
                                 17

 Economists classify economic resources into four
  general categories
  1.   Land – natural resources like forests, minerals, air, water,
       oil, solar power, wind, etc.
  2.   Labor – the physical and mental activities that people
       contribute to the production of goods and services
  3.   Capital – all goods that are produced for the purpose of
       producing other (final) goods and services (factories,
       machinery, tools, etc.)
                     Resource Categories
                                     18

4.       Entrepreneurship – the special human resource that
         combines land, labor, and capital to actually produce
         something
          Makes strategic business decisions
          Innovates
          Bears the risk of failure but reaps the rewards for success
         Production Possibilities Model
                            19

 Let’s now take a look at a model that will help us
 understand the choices and tradeoffs that must be
 made due to scarcity – the Production Possibilities
 Model
          Production Possibilities Model
                                 20

 Assumptions:
   Full employment – the economy is employing all of its
    resources
   Fixed resources – the quantity and quality of resources are
    fixed
   Fixed technology – the state of technology is fixed

   Only two goods are produced: pizzas and industrial robots
           Production Possibilities Model
                               21



                            Production Alternatives
 Type of Product               A     B     C     D      E

Pizzas                         0     1     2      3     4
(in hundred thousands)



Industrial Robots             10     9     7      4     0
(in thousands)


                         Plot the Points to Create the Graph…
                           Production Possibilities Model
                                                     22

                    14
                    13
                    12
                    11
                                                          The law of
                    10
                             B                            increasing
Industrial Robots




                     9
                     8
                                 C    Unattainable        opportunity
                     7
                     6                                    costs makes
                     5
                     4   U
                                      D                   the PPC
                     3
                     2   Attainable
                                                          concave.
                     1

                          0 1 2 3 4 5 6 7 8 9
                                          Pizzas
                                        Optimal Allocation
                                                   23


                                                                              MC
                                   15                                     c
Marginal Benefit & Marginal Cost

                                                        MB = MC

                                                           e
                                   10




                                   5
                                               b                      d
                                   0                                          MB
                                            1           2         3
                                            Quantity of Pizza
                 Unemployment, Growth,
                    and the Future
                             24

 Suppose we relax our assumptions from the PP
 model and there is an increase in resources?



                              Production Alternatives
     Type of Product              A'   B'   C'   D'   E'

    Pizzas                        0    2    4    6    8
    (in hundred thousands)

    Industrial Robots             14   12   9    5    0
    (in thousands)
A Growing Economy
                                      25



                    14   A’
                    13
                                  B’             Unattainable
                    12
                    11
                         A
                    10
                              B            C’            Economic
Industrial Robots


                     9
                     8                                   Growth
                                  C
                     7
                     6
                                                    D’
                     5
                                       D
                     4
                     3                                   Now Attainable
                     2   Attainable
                     1                                    E’
                                           E
                             0 1 2 3 4 5 6 7 8 9
                                                Pizzas
                       Present Choices, Future Possibilities
                                                 26




                                 Future                                                  Future
Goods for the Future




                                                      Goods for the Future
                                 Curve                                                   Curve
                                                                                  F



                       Current   P                                           Current
                        Curve                                                 Curve


                         Goods for the Present                                  Goods for the Present


                           Presentville                                         Futureville
       A Qualification: International Trade
                             27

 Our current Production Possibilities Model assumes no
  trade takes place between countries
 In our model, the consumption possibilities equal the
  production possibilities in this economy
 Later, when we introduce international trade and
  specialization and division of labor to the model we will
  see that consumption can be enhanced even though
  production is not increased!

								
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