LIMITS, ALTERNATIVES, AND CHOICES

I. Definition of Economics: The social science

concerned with how individuals, institutions and
society make choices under conditions of scarcity.
II. The Economic Perspective: economic way of
thinking
a. Scarcity and choice:
i. Scarce economic resources mean limited
goods and services
ii. TINSTAAFL
iii. Opportunity Cost: the most desirable
alternative given up in an economic
decision
b. Purposeful Behavior
i. Utility: opportunity to derive pleasure,
satisfaction or happiness
ii. Rational self-interest:
1. Purposeful behavior: people make
decisions with some desired
outcome in mind.
2. Self-interested behavior is designed
to increase personal satisfaction
c. Marginalism: Benefits and Costs
i. Marginal Analysis: comparisons of
marginal costs and benefits
1. Marginal means “extra” or one
additional unit.
a. An extra hour of study?
Another year of school?
b. Always means forgoing
something else for your
marginal benefit
III. Theories, Principles, and Models

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 a. Scientific Method: testing hypotheses
b. Economic theories and principles are
statements about economic behavior or the
economy that enable prediction of probable
effects of certain actions
i. Highly useful in understanding how the
economy works
c. Generalizations: typical consumer or for
consumers as a group
d. Other-things-equal assumption: Ceteris
Paribus
e. Graphical Expression: See chapter 1 appendix;
pgs. 26-32
IV. Microeconomics and Macroeconomics
a. Microeconomics: concerned with individual
units such as person, household, firm or
industry
i. Individual decision-making
ii. The economy under a microscope
b. Macroeconomics: Economy as a whole or its
basic subdivisions or aggregates
i. Government, household or business
sectors
ii. Aggregate: collection of specific
economic units treated as one unit
1. Obtain an overview, or general
outline, of the structure of the
economy and the relationships of its
major aggregates.
iii. Total output, total employment, total
income, aggregate expenditures, general
price levels
V. Individual’s Economic Problem: need to make
choices because wants are unlimited, but means

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(income, time, resources) for satisfying wants in
limited.
a. Limited Income: wages, interest, rents, profits;
i. Even Bill Gates has limited income
b. Unlimited Wants
i. Necessities: food, clothing, shelter
ii. Luxuries: perfume, yachts, sports cars
iii. Economic wants change over time
1. Ipods
iv. Services, as well as goods, satisfy our
wants.
1. Car repair, medical services,
accounting services, banking
v. Desires for goods and services cannot be
fully satisfied.
vi. It is in our self-interest to economize, or
pick and choose the goods and services
we desire (maximize our satisfaction).
c. A Budget Line: budget constraint
i. Schedule or curve that shows various
combinations of two products a consumer
can purchase with a specific money
income
ii. Review the example on page 11.
iii. All combinations of products on or inside
the budget line are attainable.
iv. All combinations of products beyond the
budget line are unattainable.
v. The budget line depicts trade-offs
between two products arising from
limited income.
1. The straight line budget constraint
in the example on page 11 indicates
constant opportunity cost.

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 a. The opportunity cost remains
the same as more products of
the alternative are bought.
vi. Choice: limited income forces people to
choose what to buy and what to forgo to
fulfill wants.
1. Evaluate your marginal benefits and
marginal costs.
vii. Change in Income: location of budget
line will move to the right with an
increase in income; and move to the left
with a decrease in income.
VI. Society’s Economic Problem: also under
condition of scarcity
a. Scarce Resources: Economic resources for
society are all natural, human, and
manufactured resources that go into the
production of goods and services.
b. Resource Categories: Factors of Production or
Inputs
i. Land: all natural resources (gifts of
nature)
ii. Labor: physical and mental talents of
individuals used in producing goods and
services
iii. Capital: capital goods: manufactured aids
used in producing consumer goods and
services;
1. Also known as “investment.”
2. Capital goods differ from consumer
goods in that consumer goods
satisfy wants and needs directly,
whereas capital goods do so
indirectly.

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 3. Money produces nothing; only a
means to acquire real capital.
iv. Entrepreneurial Ability
1. Entrepreneur takes initiative in
combining other three resources to
produce a good or service.
2. Makes strategic business decisions.
3. Innovator
4. Risk bearer
VII. Production Possibilities Model
a. Assumptions: Full employment, fixed
resources, fixed technology, two goods
i. Food products are consumer goods
ii. Manufacturing equipment are capital
goods
b. Production Possibilities Table: review figure
1.2 on page 15
i. There is a cost: more food products mean
less manufacturing equipment.
ii. By moving from point A to point E,
society chooses more now at the expense
of more later.
iii. Generalization: at any point in time, fully
employed economy must sacrifice some
good to obtain more of the other good.
c. Production Possibilities Curve: represents
maximum output of two products
d. Law of Increasing Costs: reflected in the
bowed shape of the curve
i. The opportunity of one additional unit of
product A is greater than the opportunity
cost of the preceding unit.
ii. Law states that the more of a product
society produces, the greater is the

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 opportunity cost of obtaining that extra
unit.
iii. Economic rationale: economic resources
are not completely adaptable to
alternative uses.
1. Many resources are better at
producing one type of good or
service than at producing others.
e. Optimal Allocation: how to maximize
satisfaction
i. Marginal benefit = marginal cost
ii. Review figure 1.3 on page 17
iii. Resources are being efficiently allocated
to any product when marginal benefit =
marginal cost
VIII. Unemployment, Growth and the Future in the
Production Possibilities Model
a. Graphically, unemployment, or
underutilization of resources are represented by
points inside the production possibilities curve:
figure 1.4 on page 19
b. A Growing Economy:
i. Increase in Resource Supplies: changes
over time.
1. A shift outward in the production
possibilities curve represents
Economic Growth or a total larger
output.
ii. Advances in Technology: more
production
1. Economic growth is a result of:
a. Increases in supplies of
resources
b. Improvements in resource
quality

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 c. Technological advances
c. Present Choices and Future Possibilities:
i. Goods for the present are consumer
goods such as food, clothing and
entertainment
ii. Goods for the future are capital goods and
are the ingredients for economic growth
iii. Good for the future will move the curve
further outward then goods for the
present: see figure 1.6 on page 22