Chapter 1 Lecture Notes PDF

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Introduction to microeconomics with chapter 1 on limits alternatives and choices...

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Chapter 1

Limits, Alternatives, and Choices

Economics – Social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity The Economic Perspective Economic Perspective has critical and interrelated features Scarcity and Choice Scarcity limits options and demand choices (core idea of economics) o Scarcity is the limited quantities of land, capital, labor and entrepreneur ability that are never sufficient to satisfy people’s virtually unlimited economic wants. Opportunity costs – to obtain more of one thing, society forgoes the opportunity of getting the next best thing Purposeful Behavior Economics assumes rational self-interest o Individuals pursue opportunities to increase utility  Utility – the satisfaction obtained from consuming a good or service o Purposeful Behavior – people make decisions with desired result in mind  Can be influenced by faulty logic and emotions o Self-interest – behavior design to increase personal satisfaction, however may it be derived  Not the same as selfishness – Increasing one’s interests normally requires satisfying other’s wants Marginal Analysis: Comparing Benefits and Costs Economic perspective focuses on marginal analysis o Marginal analysis – Comparisons of marginal benefits and costs, usually for decision making o Decisions must take both marginal benefits and costs into account  Obtaining benefits always includes the costs of forgoing something else  Opportunity cost is always present whenever there is a choice Theories, Principles, and Models Economic replies on the scientific method (Observation, testing, etc.) o Economic principle – a statement about economic behavior that enables the prediction of the probable effects of certain actions.  Theories, principles, and models are purposeful simplifications – economy is too complex o Economic principles are useful in analyzing and understanding economy  Principles are generalizations relating to economic behavior  Other-things-equal assumption (“ceteris paribus”)– Principles assume that factors other than those being considered do not change  Many models are expressed graphically Microeconomics and Macroeconomics Two levels of principles and models are developed Microeconomics Microeconomics – economics concerned with decisions made by individuals, house holds and business firms o Examination of individuals and specific products Macroeconomics Macroeconomics – economics concerned with the economy as a whole, subdivisions or aggregates o Aggregates help obtain a general outline of economic structure  Aggregate – a collection of specific economic units treated as one unit Positive and Normative Economics Positive economics focuses on real facts and relationships – “What is” Normative economics focuses on an idea economic system – “What ought to be” o Most controversies are disagreements over economic policies Individual’s Economizing Problem Economizing problem – the need to make choices because economic wants exceeds the means Individual needs to decide on where to spend money o Finite amount of income > decide on how to spend

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Individuals have unlimited wants – unending desire for utility  New products and services lead to changed economic wants  Satisfaction of certain wants may trigger other wants

Economizing problem can be visualized using a budget line o Budget line – a schedule or curve that shows various combinations of products obtainable with a certain income o There are attainable and unattainable combinations o There are trade-offs and opportunity costs for every combination o Limited income forces people to make choices o Income changes allows for different combinations

Society’s Economizing Problem Society needs to decide on which sector to devote more resources on o Resource is limited o Factors of Production (inputs)  Land – natural resources used in production  Labor – physical and mental activities contributed by people  Capital – Manufactured aids used in producing consumer goods and services  Indirectly helps to satisfy wants by aiding production  Entrepreneurial Ability – special human resource: innovates, strategic plans, takes initiative, and bears risk Production Possibilities Model There are different possible combinations of production o Assume:  Full employment,  Fixed resources,  Fixed technology  Two goods (consumer and capital) o Generalization: At any time, a fully employed economy must sacrifice some of one good to obtain more of another good o Production possibilities graph – graphic display of production possibilities using a curve  Production Possibilities 9 8 7 Product 2

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0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Product 1

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Law of increasing opportunity costs – as the production of a particular good increases, the opportunity costs of producing an additional unit rises o Demonstrated by a curve on the graph – the rate of increase slows down as one variable gets bigger o Due to resources not adapt to alternate uses Optimal Allocation – optimal activity is when marginal benefits = marginal costs

Unemployment, Growth, and the Future Unemployment causes economy to produce less than full capacity o Graphically represented by a point within the curve

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Economic growth is an increase in total output resulting from: o Increases in resources allows a lager output o Improvements in resource quality for better goods o Technological advances for improved production Economy’s current choice of production determines future production possibilities o Production of capital goods increases production of consumer goods Domestic production possibilities curve can be altered by international specialization and trade o International trade allows for a lower opportunity costs for certain items...