• Chapter Objectives– Economics defined– Role of economic theory– Microeconomics vs. macroeconomics– Resource scarcity and the economizing problem– Production possibilities model• Economics Defined– Economic wants exceed productive capacity– Social science concerned with making optimal choices under conditions of scarcity• The Economic Perspective– Thinking like an economist– Key features:• Scarcity and choice• Purposeful behavior• Marginal analysis• Scarcity and Choice– Resources are scarce– Choices must be made– There is no free lunch– Opportunity cost • Purposeful Behavior– Rational self-interest– Individuals and utility– Firms and profit– Desired outcomes• Marginal Analysis– Marginal benefit– Marginal cost– Marginal means extra– Comparison of marginal benefit and marginal cost• Economic Models– The scientific method– Cause and effect– Economic principles– Simplification of reality– Other-things-equal assumption – Graphical expression• Macro vs. Micro– Macroeconomics• Aggregate– Microeconomics• Individual Units– Positive Economics– Normative Economics• Individual’s Economizing Problem– Limited income– Unlimited wants– A budget line– Tradeoffs & opportunity costs– Make best choice possible– Change in income• A Budget Line• Society’s Economizing Problem– Scarce resources• Land• Labor• Capital• Entrepreneurial Ability– Factors of production• Production Possibilities Model– Illustrate production choices – Assumptions: • Full employment• Fixed resources• Fixed technology• Two goods • Production Possibilities Curve• Production Possibilities Curve• Production Possibilities Curve• The Future Economy– Consequences of unemployment– Economic growth• More resources • Better quality resources• Technological advances• Future Possibilities• International Trade– Production point– Consumption point– Specialization – Preview• Optimal Allocation of Resources• LAST Word: Pitfalls to Sound Economic Reasoning– Biases– Loaded terminology– Fallacy of composition– Post hoc fallacy– Correlation but not causation • Key Terms– Economics: the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.– economic perspective: a view point that envisions individuals 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 foregone 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: the assumption that factors other than those being considered are held constant; ceteris paribus – macroeconomics: the part of economics concerned with the economy as a whole; with such major aggregates as the house-hold, 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 ex, 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 household, a firm, or an industry and with individual markets, specific goods and services, and product and 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.– 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 2 products a consumer can purchase with a specific money income, given the product’s prices.– economic resources: the land, labor, capital and entrepreneurial ability that are used in the production of goods and services; productive agents; factors of production.– Land: natural resources 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 (building, machinery, and equipment) used to produce goods and services; goods that don’t directly satisfy human wants.– Investment: in economics, 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.– factors of production: economic resources- land, labor, capital, entrepreneurial ability.– consumer goods: products and services that satisfy human wants directly.– capital goods: – production possibilities curve: a curve showing the different combinations of 2 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 costs: 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 froman increase in resource supplies or quality or an improvement in technology; (2) an increase of real output GDP or real output per