Chapter 1 Handout

Principles of Microeconomics + DiscoverEcon code card

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Chapter 1 Limits, Alternatives and Choices Chapter 1 Limits, Alternatives and Choices I. Definition of Economics A. The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human materials wants. B. Human wants are unlimited, but the means to satisfy the wants are limited. II. The Economic Perspective – economic self-interest underlies economic behavior A. Scarcity and choice . – concerned with choices that are made to use scared resources efficiently 1. Resources can only be used for one purpose at a time. 2. Scarcity requires that choices be made. 3. The cost of any good, service, or activity is the value of what must be given up to obtain it ( opportunity cost ). B. Free for All ? 1. Products provided for “free” to an individual are not free for society because of the required use of scarce resources to produce them. 2. Companies provide “free” goods as a marketing strategy to promote brand awareness. 3. Products that are promoted as “free” to the individual may actually be bundled with another good for which the consumer must pay. Because a purchase is required to obtain them, these products are not really free to the buyer. C. Rational Behavior . 1. Rational self-interest entails making rational decisions to achieve maximum utility (pleasure or satisfaction). 2. Different preferences and circumstances lead to different choices. 3. Rational self-interest is not the same as selfishness. D. Marginalism : benefits and costs. 1. Most decisions concern a change in current conditions; therefore the economic perspective is largely focused on marginal analysis . 2. Each option considered weighs the marginal benefit against the marginal cost. Marginal Costs exists because to produce more of some product means not producing some other product . 3. Whether the decision is personal or one made by business or government, the principle is the same. 4. The marginal cost of an action should not exceed its marginal benefits. 5. There is “no free lunch” and there can be “too much of a good thing.” 6. Conflicts between long and short-run objectives may result in decisions that appear to be irrational, when if fact they are not. III. Why Study Economics? A. Economics for citizenship - VOTE with intelligence. 1. Most political problems have an economic aspect, whether it is balancing the budget, fighting over the tax structure, welfare reform, international trade, or concern for the environment. 1
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Chapter 1 Limits, Alternatives and Choices 2. Both the voters and the elected officials can fulfill their role more effectively if they have an understanding of economic principles. B. Professional and personal applications. 1. The study of economics helps to develop an individual’s analytical skills and allows students to better predict the logical consequences of their actions.
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