Slide 1Chapter ObjectivesEconomics DefinedThe Economic PerspectiveScarcity and ChoicePurposeful BehaviorMarginal AnalysisEconomic ModelsMacro vs. MicroIndividual’s Economizing ProblemA Budget LineSociety’s Economizing ProblemProduction Possibilities ModelSlide 14Production Possibilities CurveSlide 16Slide 17The Future EconomyFuture PossibilitiesInternational TradeOptimal Allocation of ResourcesLAST Word: Pitfalls to Sound Economic ReasoningKey TermsSlide 24Limits, Alternatives, and ChoicesChapter 1McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter Objectives•Economics defined•Role of economic theory•Microeconomics vs. macroeconomics•Resource scarcity and the economizing problem•Production possibilities model1-2Economics Defined•Economic wants exceed productive capacity•Social science concerned with making optimal choices under conditions of scarcity1-3The Economic Perspective•Thinking like an economist•Key features:–Scarcity and choice–Purposeful behavior–Marginal analysis1-4Scarcity and Choice•Resources are scarce•Choices must be made•There is no free lunch•Opportunity cost 1-5Purposeful Behavior•Rational self-interest•Individuals and utility•Firms and profit•Desired outcomes1-6Marginal Analysis•Marginal benefit•Marginal cost•Marginal means extra•Comparison of marginal benefit and marginal cost1-7Economic Models•The scientific method•Cause and effect•Economic principles•Simplification of reality•Other-things-equal assumption•Graphical expression1-8Macro vs. Micro•Macroeconomics–Aggregate•Microeconomics–Individual Units•Positive Economics•Normative Economics1-9Individual’s Economizing Problem•Limited income•Unlimited wants•A budget line•Tradeoffs & opportunity costs•Make best choice possible•Change in income1-10A Budget Line6543210024681012DVDs$20Books$101210 8 6 4 2 02 4 6 8 10 12 14$120 BudgetIncome = $120Pdvd = $20= 6Income = $120Pb = $10= 12AttainableUnattainableQuantity of Paperback BooksQuantity of DVDs1-11Society’s Economizing Problem•Scarce resources–Land–Labor–Capital–Entrepreneurial Ability•Factors of production1-12Production Possibilities Model•Illustrate production choices•Assumptions:–Full employment–Fixed resources–Fixed technology–Two goods1-13Type of ProductPizzas (in hundred thousands)Industrial Robots (in thousands)Production AlternativesA B C D E10 9 7 4 00 1 2 3 4Plot Points to Create Graph…Production Possibilities Table1-14Production Possibilities CurvePizzasIndustrial RobotsAttainable0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1UnattainableABCDEEconomicGrowthNow AttainableA’B’C’D’E’1-15Production Possibilities CurvePizzasIndustrial RobotsAttainable0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1UnattainableABCDELaw of IncreasingOpportunity CostA’B’C’D’E’Shape of the Curve1-16Production Possibilities CurvePizzasIndustrial RobotsUnder or Unemployment0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1UnattainableA’B’C’D’E’U1-17The Future Economy•Consequences of unemployment•Economic growth–More resources –Better quality resources–Technological advances1-18Future PossibilitiesGoods for the PresentGoods for the FutureGoods for the FutureGoods for the PresentPFCurrentCurveCurrentCurveFutureCurveFutureCurvePresentvilleFutureville1-19International Trade•Production point•Consumption point•Specialization •Preview1-20Optimal Allocation of Resources1510 5 01 2 3abcdeMB = MCMCMBQuantity of PizzaMarginal Benefit & Marginal Cost1-21LAST Word: Pitfalls to Sound Economic Reasoning•Biases•Loaded terminology•Fallacy of composition•Post hoc fallacy•Correlation but not causation 1-22Key Terms•economics•economic perspective•opportunity cost•utility•marginal analysis•scientific method•economic principle•other-things-equal assumption•macroeconomics•aggregate•microeconomics•positive economics•normative economics•economizing problem•budget line•economic resources•land•labor•capital•investment•entrepreneurial ability•factors of production•consumer goods•capital goods•production possibilities curve•law of increasing opportunity costs•economic growth1-23The Market System and the Circular