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ECO 201/202 Principles of EconomicsNotes for Chapter 1: Limits, Alternatives, and Choices

I. Chapter objectivesa. Define economics

b. Explain economic core conceptsc. Identify and discuss the significance of the key points of the production possibilities

modeld. Use real-world examples to explain the law of increasing opportunity costs

II. Economics defineda. The economic perspective

i. Scarcity and choice1. There are not enough resources (inputs) available to produce all of the

goods and services that society would like to consume2. Opportunity costs: the economic cost of something is the next best

thing you must give up to get ita. You cant have it all b. Scarcity results in sacrifices

ii. Purposeful behavior1. Self-interest: the choices that are best for the individual who makes

them2. Selfishness and selflessness

a. How might selfish behavior benefit the economy? b. How might selfless behavior benefit the economy?

3. Marginal analysis ( see the additional example provided in course content

module 1) a. The margin: a choice on the margin is a choice that is made by

comparing all the relevant alternatives incrementallyb. Marginal cost: the opportunity cost that arises from a one-unit

increase in an activityc. Marginal benefit: the benefit that arises from a one-unit

increase in an activity4. Helpful hints

a. Recognize that economic principles are generalizations theyidentify how a typical producer or consumer behaves

b. Assume ceteris paribus isolate variables and simplify youreconomic analysis

c. Use graphical expressions visually depict complex economicrelationships

b. The economic way of thinking for the individual i. An individuals reality

1. Individuals have limited resources

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a. Incomeb. Time

2. Individuals have unlimited wantsa. Necessitiesb. Luxuries

3. Individuals have budget constraintsii. An individuals decision -making process

1. Individuals evaluate the opportunity cost of every decision 2. Individuals evaluate the utility generated by every decision 3. Individuals evaluate the marginal cost and marginal benefit of every

decisionc. The economic way of thinking for society

i. Societ ys reality 1. Society has limited economic resources

a. Landb. Labor

i. Quantity number of workers in the workforceii. Quality skills of the workforceiii. Why is it important to differentiate between the

quantity of labor available to society and the quality oflabor available to society?

c. Capitald. Entrepreneurial ability

2. Society has unlimited wantsii. Societys decision -making process

1. Society evaluates the opportunity cost of every decision2. Society evaluates the utility generated by every decision3. Society evaluates the marginal cost and marginal benefit of every

decisionIII. The production possibilities model ( see the additional example provided in course content

module 1) a. Production possibilities (PPC) defined: the alternative combinations of goods and

services that can b e produced (in a given time period) if all of societys resources areused efficiently

i. Initial assumptions1. Full employment2. Fixed resources3. Fixed technology4. Two goods

ii. Key points1. Points that fall on the PPC

a. Resources are fully employed

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