Microeconomics Chapter 1 PDF

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

microeconomics McConnell Brue Flynn Chapter 1 Limits, Alternatives, and Choices © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consen  Economics Preferred Definition: The study of allocating scarce resources over unlimited wants McConnell, Brue, Flynn Definition: Economics is a social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity. LO1. Economic wants exceed society’s productive © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. 1-2  Why Study Economics? Economic literacy gives people the tools to make better individual and social decisions about issues they will encounter over a lifetime. Burton G. Malkiel, author of ‘A Random Walk Down Wall Street’ © 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 by comparing the marginal benefits and marginal costs. It considers: Scarcity and Choice - resources are scarce; choices must be made Opportunity cost – what is foregone when a choice is made; the next best alternative There is no “free lunch” Utility – the pleasure or satisfaction derived from consuming a good or service Marginal analysis – comparisons of marginal benefits and LO1. marginal costs; “marginal” = additional or change in 1-4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Purposeful Behavior Purposeful behavior: Individuals allocate their time, energy, and money to maximize utility Rational self-interest – Economics assumes decision-makers pursue opportunities to increase their utility by comparing costs and benefits Individuals seek to maximize utility Firms seek to maximize profit Resource owners seek to maximize income LO1. 1-5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Consider This… Page 2: Is Facebook Free? 1-6 © 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 and testing of 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. 1-7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Economic Principles An Economic principle or law is a well-tested and widely accepted theory; a statement about economic behavior that enables forecasts of probable effects of certain actions Combinations of economic principles are incorporated into Economic Models which are simplified representations of the economy or portions of the economy Generalizations – principles are generalizations relating to economic behavior or to the economy itself. They are tendencies of the typical situation, or in the aggregate Other-things-equal assumption - Ceteris paribus; factors other than those being considered do not change Graphical expression LO1. 1-8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Microeconomics and Microeconomics:Macroeconomics The study of the individual consumer, firm, or market. Macroeconomics: The study of the entire economy or a major aggregate of the economy: GDP = C + Ig + G + Xn Key indicators: GDP (Real) Growth Rate: Bureau of Economic Analysis (bea.gov) 2nd Q 2024: +2.8% annualized rate of growth Year 2023: +2.5% annualized rate of growth; $27,361 billion (nominal) Unemployment Rate (and new jobs created): Bureau of Labor Statistics (bls.gov) July 2024: 4.3%; 119,000 new jobs created For comparison: February 2020: 3.5%; April 2020: 14.8% Inflation (various measures): bls.gov and others CPI: July 2024: +0.2%; 12-month: +2.9% LO1. 1-9 © 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. 1-10 © 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: Economic wants are unlimited or insatiable Economic resources (the means to produce goods and services) are limited or scarce Individual’s Economizing Problem: The Budget Line – a schedule or curve showing various combinations of two products a consumer can purchase with a specific money income. The analysis generalizes to the full range of products available to the consumer Attainable and unattainable combinations Trade-offs and opportunity costs Limited income forces consumer to make choices to gain the greatest utility Income changes – increase income shifts budget line outward and vice versa LO1. 1-11 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Click to edit Master A Consumer’s titleLine Budget style The Budget Line: Combinations of T-shirts and Paperback Books 12 Attainable with an Income of $120 (Amazon gift card) 10 Income = $120 =6 Units of Units of Pm = $20 8 Quantity of movies T-shirts Books (Price = (Price=$1 Total Unattainable $20) 0) Expenditure 6 6 0 $120 (=$120+ Income = $120 $0) 4 P = $10 = 12 b 5 2 $120 (=$100+ $20) Attainable 2 4 4 $120 (=$80+ $40) 0 3 6 $120 (=$60+ 2 4 6 8 $60) 10 12 14 Quantity of paperback books 2 8 $120 (=$40+ LO1. $80) 1-12 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Global Perspective 1.1 For 2023, US per capita GDP was approximately $81,695 (World Bank estimate). The global average per capita GDP for 2023 was approximately $13,920 (IMF). Refer to: https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita And https://www.worlddata.info/largest-economies.php 1-13 LO1. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Source: data.worldbank.org  Consider This… Page 7: Did Zuckerberg, Durant, and Grande Make Bad Choices? 1-14 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Society’s Economizing Problem Economic Resources (also referred to as the “Factors of Production” or “Inputs”) are scarce Land – all natural resources used in the production process; income is “rent” Labor – all physical and mental talents and activities of individuals used in producing goods and services; income is “wage” Capital – all manufactured aids and intangible ideas used to produce products; does not directly satisfy consumer wants; income is “interest” Investment – acquiring capital Entrepreneurial ability – bringing other resources together to produce products efficiently; income is “profit” LO1. 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 in combining other resources in new ways Make strategic business decisions Innovate Take risk LO1. 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 Simplified model of the macroeconomy that shows different combinations of two goods that an economy can produce; Assumptions: Full employment – economy is employing all of its resources efficiently Fixed resources* – in quality and quantity Fixed technology* 2-good economy: Consumer goods (pizza) and capital goods (robots) *looking at the economy at a point in time Given the assumptions, in order to get more of one good, we must give up some of the other good LO1. 1-17 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  The Production Possibilities and Curve Production Possibilities of Pizzas 11 Q A 10 Industrial robots (thousands) Industrial Robots B Production 9 Unattainable Types of Alternatives 8 Product 7 C W A B C D E 6 Pizzas 5 (in hundred 0 1 2 3 4 4 D thousands) 3 Attainable 2 Industrial 1 Robots 10 9 7 4 0 E (in thousands) Q 0 1 2 3 4 5 6 7 8 (hundred Pizzas 9 thousands) LO1. 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. 1-19 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  What is the best combination of the two goods? Any economic activity should be expanded as long as the marginal benefit (MB) exceeds the marginal cost (MC) The optimal choice is that output at which 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 Quantity of pizza LO1. 1-20 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Unemployment and Growth No longer assume full employment and efficiency; fixed resources and technology Unemployment: Any point inside the curve shows unemployment or inefficiency – economy could get more of one or both products without giving up anything Economic Growth: ability to produce larger total output over time Results from: Increase quantity or quality of resources Technological advances - economy can produce more efficiently, so it can produce more with the same 1-21 resources © 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 14 A′ production possibilities curve 13 B′ 12 Robots (thousands) 11 Types of Production Alternatives 10 Product 9 C′ A' B' C' D' E' 8 7 Pizzas 6 (in hundred 0 2 4 6 8 5 D′ thousands) 4 Industrial 3 Robots 2 14 12 9 5 0 1 (in E′ thousands) Q 0 1 2 3 4 5 6 7 8 (hundred Pizzas 9 thousands) LO1. 1-22 © 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. 1-23 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Global Perspective 1.2 LO1. 1-24 © 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: produce the products for which the country has the lower opportunity costs Results in: Increased consumption possibilities Increased world production LO1. 1-25 © 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.  Homework Pages 17 -19 Discussion Questions: 2 and 5 Review Questions: 1, 2, 3, 4, 5, 7, 8, and 9 Problems: 3, 5, 6, and 7 1-27 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.