McConnell, Brue, Flynn Economics Chapter 1 PDF

economics McConnell Brue Flynn Chapter 1 Limits, Alternatives, and Choices © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC....

economics McConnell Brue Flynn Chapter 1 Limits, Alternatives, and Choices © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Chapter Contents The Economic Perspective Theories, Principles, and Models Microeconomics and Macroeconomics Individual’s Economizing Problem Society’s Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future 1-2 © McGraw Hill LLC. All rights reserved. No reproduction or further distribution without the prior written consent of McGraw Hill LLC.  Economics Economics is a social science concerned with making optimal choices under conditions of scarcity. Economic wants exceed society’s productive capacity. LO1.1 1-3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  The Economic Perspective A viewpoint that envisions individuals and institutions making rational decisions in their own self-interest. It considers: Scarcity and choice Opportunity cost Purposeful behavior to increase utility Marginal analysis by comparing the marginal benefits and marginal costs LO1.1 1-4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Scarcity and Choice Resources are scarce. Choices must be made. Opportunity cost. There is no free lunch. LO1.1 1-5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Purposeful Behavior Rational self-interest. Individuals and utility. Firms and profit. Desired outcome. LO1.1 1-6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Marginal Analysis The comparison of marginal benefits and marginal costs, usually for decision making. Marginal means “extra” or “additional.” LO1.1 1-7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Theories, Principles, and Models The scientific method is the procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation of testing hypotheses to obtain theories, principles, and laws. It consists of several elements: Observe. Formulate a hypothesis. Test the hypothesis. Accept, reject, or modify the hypothesis. Continue to test the hypothesis, if necessary. LO1.2 1-8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Economic Principles Generalizations Other-things-equal assumption: The assumption that factors other than those being considered did not change. (Also called the “ceteris paribus assumption.”) Graphical expression LO1.2 1-9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Microeconomics and Macroeconomics Microeconomics: The study of the individual consumer, firm, or market. Macroeconomics: The study of the entire economy or a major aggregate of the economy. LO1.3 1-10 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Positive and Normative Economics Positive economics: Economic statements that are factual. Normative economics: Economic statements that involve value judgments. LO1.3 1-11 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  The Economizing Problem The economizing problem: Limited income and unlimited wants. The budget line Attainable and unattainable combinations Trade-offs and opportunity costs Choice Income Changes LO1.4 1-12 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Click A Consumer’s to edit Master Budget titleLine style The Budget Line: Combinations of T-shirts and Paperback Books Attainable with an 12 Income of $120 10 Income = $120 =6 Units of T- Units of Pm = $20 shirts Books 8 Quantity of movies (Price = $20) (Price=$10) Total Expenditure Unattainable 6 0 $120 (=$120+$0) 6 5 2 $120 (=$100+$20) Income = $120 4 = 12 4 4 $120 (=$80+$40) Pb = $10 Attainable 3 6 $120 (=$60+$60) 2 2 8 $120 (=$40+$80) 0 1 10 $120 (=$20+$100) 2 4 6 8 10 12 14 0 12 $120 (=$0+$120) Quantity of paperback books LO1.4 1-13 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Global Perspective 1.1 1-14 ©LO1.4 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Source: data.worldbank.org  Society’s Economizing Problem Four categories of economic resources: 1. Land: Includes all natural resources used in the production process. 2. Labor: Physical actions and mental activities that people contribute to production. 3. Capital (investment): All human-produced physical objects and intangible ideas used in production. 4. Entrepreneurial ability: Special human resource distinct from labor. LO1.5 1-15 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Functions of Entrepreneurs Employ the other factors of production. Take initiative. Make strategic business decisions. Innovate. Take risk. LO1.5 1-16 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Production Possibilities Model: Overview An economic model that shows different combinations of two goods that an economy can produce. Assumptions: Full employment Fixed resources Fixed technology Two goods 1. Consumer goods 2. Capital goods LO1.6 1-17 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  The Production Possibilities Curve Production Possibilities of Pizzas and Q 11 Industrial Robots A 10 9 B Production Alternatives Unattainable Industrial robots (thousands) Types of Product 8 A B C D E 7 C W 6 Pizzas 5 (in hundred 0 1 2 3 4 4 D thousands) 3 Attainable Industrial Robots 2 10 9 7 4 0 (in thousands) 1 E 0 1 2 3 4 5 6 7 8 9 Q Pizzas (hundred thousands) LO1.6 1-18 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Increasing Opportunity Costs Law of increasing opportunity costs: As more of a particular good is produced, its marginal opportunity costs increase Production possibilities curve Concave shape Economic rationale LO1.6 1-19 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Optimal Output: MB = MC MC Marginal benefit and marginal cost a c $15 e 10 b d 5 MB = MC MB 0 100,000 200,000 300,000 LO1.6 Quantity of pizza 1-20 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Unemployment, Growth, and the Future Q Economic growth and the production 14 A′ possibilities curve 13 B′ 12 11 Types of Production Alternatives Robots (thousands) 10 Product C′ A' B' C' D' E' 9 8 Pizzas 7 (in hundred 0 2 4 6 8 6 D′ thousands) 5 4 Industrial 14 12 9 5 0 3 Robots 2 (in thousands) 1 E′ Q 0 1 2 3 4 5 6 7 8 9 Pizzas (hundred thousands) LO1.7 1-21 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Present Choices, Future Possibilities Future Future Goods for the future Goods for the future Curve Curve F P Current Current curve curve 0 0 Goods for the present Goods for the present Presentville Futureville LO1.7 1-22 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Global Perspective 1.2 LO1.7 1-23 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Source: data.worldbank.org  International Trade Specialization Increased production possibilities LO1.7 1-24 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Last Word: Pitfalls to Sound Economic Reasoning Here are some common pitfalls to avoid in successfully applying the economic perspective: 1. Biases 2. Loaded Terminology 3. Fallacy of Composition 4. Post Hoc Fallacy 5. Correlation but Not Causation © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.