Limits, Alternatives, and Choices

Transcription

1 Limits, Alternatives, and Choices - s Defined.. Role of Theory. and Macroeconomics. Scarce Resources. The. Possibilities. - The Definition of s The social science that studies how individuals, institutions, and society make optimal choices under conditions of scarcity. Scarcity and Choice. Opportunity Cost. Purposeful Behavior. Rational self-interest entails making decisions to achieve maximum utility. Utility is the pleasure or satisfaction obtained from consuming a good or service. Different preferences and circumstances (including errors) lead to different choices. Rational self-interest is not the same as selfishness. Marginal Analysis. Marginal Benefits. Marginal Costs. -

2 The Scientific Method. The scientific method consists of: The observation of facts (real data). The formulations of explanations of cause and effect relationships (hypotheses) based upon the facts. The testing of the hypotheses. The acceptance, rejection, or modification of the hypotheses. The continued testing with an eye toward determination of a theory, law, principle, or model. - Principle. Principles are used to explain and/or predict the behavior of individuals and institutions. Terminology Principles, laws, theories, and models are all terms that refer to generalizations about economic behavior. They are used synonymously in the text, with custom or convenience governing the choice in each particular case. Generalizations. Other-Things-Equal Assumption (ceteris paribus). Graphical Expression. - Macroeconomics and Macroeconomics. Macroeconomics examines the economy as a whole. It includes measures of total output, total employment, total income, aggregate expenditures, and the general price level. It is a general overview examining the forest, not the trees.. looks at specific economic units. It is concerned with the individual industry, firm or household and the price of specific products and resources. It is an examination of trees, and not the forest. -

3 Positive s. Positive economics describes the economy as it actually is, avoiding value judgments and attempting to establish scientific statements about economic behavior Normative s. Normative economics involves value judgments about what the economy should be like and the desirability of the policy options available. Most disagreements among economists involve normative, value-based questions. -7 Individuals are confronted with the need to make choices because their wants exceed their means to satisfy them. Limited Income. Unlimited Wants. A Budget Line. Attainable and Unattainable Combinations. Tradeoffs and Opportunity Costs. Choice. Income Change. - Budget Line. Definition: A schedule or curve that shows the various combinations of two products a consumer can purchase with a specific money income. Attainable and Unattainable Combinations. Tradeoffs and Opportunity Costs. Choice. Income Change. -9

4 - $ Budget DVDs Books $0 $ 0 0 Quantity of DVDs 0 Income = $ = P dvd = $0 Attainable Unattainable Income = $ = P b = $ Quantity of Books - Average Income, Selected Nations Country Switzerland United States Japan France South Korea Mexico Brazil China Pakistan Nigeria Rwanda Liberia GLOBAL PERSPECTIVE Per Capita Income 00 $,0,00 7,0 0,090,90,770,090, Source: World Bank Scarce Resources. resources are limited relative to wants. resources are sometimes called factors of production and include all natural, human, and manufactured resources used to produce goods and services. Resource Categories. Land. Labor. Capital. Investment. Entrepreneurial Ability. -

5 Land signifies more than soil or acreage; it includes all raw materials (timber, water, minerals, and other production inputs). Labor denotes the work (both physical and mental) that goes into the production process. Capital refers to physical aids to production, such as factories, machinery, and tools. Entrepreneurship is the managerial function that combines all these economic resources in an effective way and uncovers new opportunities to earn profit. - Full Employment. Fixed Resources. Fixed Technology. Two Goods. Consumer Goods (Pizzas). Capital Goods (Industrial Robots). - Type of Product Pizzas (in hundred thousands) Industrial Robots (in thousands) Possibilities Table Alternatives A B C D E Plot Points to Create Graph -

6 Possibilities Curve Industrial Robots 9 7 A A B B C Attainable D C E Pizzas Unattainable Growth D Now Attainable E G. - Industrial Robots 9 7 Possibilities Curve A A B B C Attainable D C E Pizzas Unattainable Law of Increasing Opportunity Cost D E Shape of the Curve W. -7 Industrial Robots 9 7 Possibilities Curve A U B C Under or Unemployment D Pizzas Unattainable E -

7 Optimal Allocation of Resources Marginal Benefit & Marginal Cost a c MB = MC e b d MC MB 0 Quantity of Pizza -9 Unemployment Growth and the A Growing Economy. Growth. Increasing Resource Supplies. Increasing Resource Quality. Technological Advances. -0 Present Choices & Possibilities Compare Two Hypothetical Economies Goods for the Current Curve Curve P Goods for the Present Presentville Goods for the F Current Curve Curve Goods for the Present ville Implications of International Trade - 7

8 Pitfalls to Sound Reasoning Last Word Biases. Loaded Terminology. Fallacy of Composition. Post Hoc Fallacy. Correlation but not Causation. - s perspective Opportunity cost Utility Marginal analysis Scientific method principle Other-things-equal assumption Macroeconomics Aggregate Positive economics Normative economics problem Budget line Key Terms resources Land Labor Capital Investment Entrepreneurial ability Factors of production Consumer goods Capital goods possibilities curve Law of increasing opportunity costs growth - Next Chapter Preview The Market System and the Circular Flow Chapter Next -