CHAPTER ONE
LIMITS, ALTERNATIVES, AND CHOICES
CHAPTER OVERVIEW
This chapter begins with a discussion of the Ten Key Concepts to retain from the course and
the meaning and importance of economics. In this first chapter, however, we will not plunge
into problems and issues; instead we consider some important preliminaries. We first look at
the economic perspective—how economists think about problems. Next, we examine the
specific methods economists use to examine economic behaviour and the economy, including
distinguishing between macroeconomics and microeconomics. We then look at the economic
problem from both an individual and societal perspective. For the individual we develop the
budget line, for society the production possibilities model. In our discussion of production
possibilities, the concepts of opportunity costs and increasing opportunity costs,
unemployment, growth, and present vs. future possibilities are all demonstrated. Finally, in the
Last Word, some of the problems, limitations, and pitfalls that hinder sound economic
reasoning are examined.
The Appendix to Chapter 1 provides an important introduction to graphical analysis. While
this will be review material for most students, for some this may be new. Instructors are
strongly urged to confirm that their students understand this section before proceeding. The
software supplement can provide effective remedial help for those students who are not
familiar with graphical analysis, or just need a refresher.
WHAT’S NEW
At the beginning of each chapter, the learning objectives have been modified to reflect tasks
students should be able to complete.
The definition of investment has been clarified by specifying that it is spending on
production or accumulation of capital goods.
When explaining the reason that money is not capital it is now specified that money is not
only used to buy capital goods, but also to buy goods and services.
An example of capital has been added – ovens that are used to bake loaves of bread.
A more detailed explanation of entrepreneurs and their role in economic growth has been
included.
There are now questions and problems at the end of each chapter where the questions are
analytical and open-ended while the problems are focused on computations.
, There are no longer questions that are designated as Key Questions.
Web based questions have been removed from each chapter and students are directed to
the book’s online learning center for questions that require information from the web.
References in graphs, tables, and study questions have been updated to reflect the most
current data available.
INSTRUCTIONAL OBJECTIVES
After completing this chapter, students should be able to:
1. Define economics.
2. Describe the “economic way of thinking,” including definitions of purposeful
behaviour, utility, marginal costs, marginal benefits and how these concepts may be
used in decision-making.
3. Explain how economists use the scientific method to formulate economic principles.
4. Explain the importance of ceteris paribus in formulating economic principles.
5. Explain the steps used by policy makers.
6. Differentiate between micro- and macroeconomics.
7. Differentiate between positive and normative economics.
8. Explain the economizing problem from the individual’s perspective
9. Construct and explain a budget line.
10. Describe the economizing problem facing society.
11. Identify types of economic resources and types of income associated with various
factors.
12. Construct a production possibilities curve when given appropriate data.
13. Illustrate economic growth, unemployment and underemployment of resources, and
increasing costs using a production possibilities curve.
14. Give some real-world applications of the production possibilities concept.
15. Summarize the general relationship between investment and economic growth.
16. Explain and give examples of the fallacy of composition, post hoc fallacy, and other
logical pitfalls. (Last Word)
17. Explain and illustrate a direct relationship between two variables, and define and
identify a positive sloping curve. (Appendix)
18. Explain and illustrate an inverse relationship between two variables, and define and
identify a negative slope. (Appendix)
19. Identify independent and dependent variables. (Appendix)
20. Define and identify terms and concepts listed at end of chapter and appendix.
, COMMENTS AND TEACHING SUGGESTIONS
1. This chapter and related classroom activities will set the tone for the rest of the
course. The methods used in the initial class meetings set the expectations and
attitudes of the students. Making dramatic changes later can be confusing and the
outcome less successful than desired. Please refer to the “Getting Started” section in
the introduction for detailed suggestions. If you plan to make current events an
integral part of the class, consider offering educational subscriptions to The Globe and
Mail, or one of the weekly news or business publications such as The Economist.
2. On the level of personal decision-making, students might be asked to list all of the
economic choices they had to make that day or that week. This impresses upon them
that, as Alfred Marshall said in the 1890s, “economics is the study of man in the
ordinary business of life.” To illustrate the rational basis of their decisions, students
could analyze one or two of these choices in terms of the alternatives they gave up.
What other choices did they have? What criteria were used to judge the alternatives?
A discussion of how rational our decisions are might also follow, providing an
opportunity to introduce problems such as imperfect information and short v. long-
term objectives.
3. There are many dimensions to the topic of “utility” that introductory students will
benefit from contemplating. With these many dimensions comes the danger in taking
students too deep too quickly. It is useful for students to understand that utility may
be obtained both through material and nonmaterial means. Accordingly, it may be
difficult to express how much one is willing to pay (or otherwise sacrifice) to obtain
utility through a given activity.
When discussing rational behaviour, and seemingly irrational decisions, is may be
useful to point out that for some people their utility is interdependent. You can have
a bit of fun telling students that economists define love as “strongly interdependent
utility functions.” The main point, of course, is that there are many situations where
people obtain utility through seeing others having material and nonmaterial wants
satisfied. Likewise, some gain utility from watching others suffer, even if it means
that they are themselves worse off in material terms.
If a question arises about the measurement of utility, the distinction between cardinal
and ordinal utility can be made, but there is little to be gained from an elaborate
discussion. Students may find it interesting that Jeremy Bentham (whom they meet in
Origins web-button 1.2) envisioned some sort of “util-o-meter,” a contraption that
one might strap to the head to record brain waves in an attempt to measure utility
from an activity. Even suggesting that one might use “utils” as a measure of
satisfaction often amuses students and helps them better recall this topic.
4. As the text suggests, it may be useful to discuss several non-economic examples to
illustrate the importance of models or simplification – for example, explaining that a
road map is a model or simplification of the real world. The amount of detail on any
road map would be determined by the needs of the traveler, i.e., “I need to travel
between Winnipeg and Regina as quickly as possible,” versus, “I would like to visit
some historical museums as I am traveling through Nova Scotia.” Neither road map
, would have the details of the real world. Devoting some time and effort to this point
can help students see the importance of using economic models to represent the real
world. You may wish to use the AAI piece below (previously on the web site).
Concept Illustration -- Abstractions and Models
"What do you consider the largest map that would be really useful?"
"About six inches to the mile."
"About six inches!" exclaimed Mein Herr. "We very soon got six yards to the
mile. And then came the grandest idea of all! We actually made a map of the
country on a scale of a mile to a mile!"
"Have you used it much?" I enquired.
"It has never been spread out yet," said Mein Herr. "The farmers objected. They
said it would cover the whole country and shut out the sunlight!"
Lewis Carroll
Silvie and Bruno, 1889
In many ways, good economic models are like good maps. Both are abstractions that
purposely leave out irrelevant facts and circumstances. Both are useful and practical
because they simplify complex realities.
Maps not only help us understand geographical relationships but also serve as
useful tools. A road map of Canada, for instance, helps us understand where Prince
Edward Island is located relative to Manitoba. It also is highly practical in helping us
drive between Saskatchewan and British Columbia.
In much the same way, economic models are helpful and useful. For example, a
model indicating how consumers respond to a change in a product’s price helps us
understand a significant facet of human behaviour. That model also is highly
practical; among other things, it identifies the primary way a business can
reduce an overstock of unsold goods.
The appropriate map or appropriate economic model is the simplest one that
accomplishes a specific goal. Although we may need a highly detailed street map of
Montreal to find a specific residence there, we need only a general road map to drive
between Montreal and Quebec City. Similarly, we need a highly complex, detailed
economic model to predict the economic effects of a general reduction of Canadian
tariffs (taxes on imported goods) on the relative outputs of various Canadian
LIMITS, ALTERNATIVES, AND CHOICES
CHAPTER OVERVIEW
This chapter begins with a discussion of the Ten Key Concepts to retain from the course and
the meaning and importance of economics. In this first chapter, however, we will not plunge
into problems and issues; instead we consider some important preliminaries. We first look at
the economic perspective—how economists think about problems. Next, we examine the
specific methods economists use to examine economic behaviour and the economy, including
distinguishing between macroeconomics and microeconomics. We then look at the economic
problem from both an individual and societal perspective. For the individual we develop the
budget line, for society the production possibilities model. In our discussion of production
possibilities, the concepts of opportunity costs and increasing opportunity costs,
unemployment, growth, and present vs. future possibilities are all demonstrated. Finally, in the
Last Word, some of the problems, limitations, and pitfalls that hinder sound economic
reasoning are examined.
The Appendix to Chapter 1 provides an important introduction to graphical analysis. While
this will be review material for most students, for some this may be new. Instructors are
strongly urged to confirm that their students understand this section before proceeding. The
software supplement can provide effective remedial help for those students who are not
familiar with graphical analysis, or just need a refresher.
WHAT’S NEW
At the beginning of each chapter, the learning objectives have been modified to reflect tasks
students should be able to complete.
The definition of investment has been clarified by specifying that it is spending on
production or accumulation of capital goods.
When explaining the reason that money is not capital it is now specified that money is not
only used to buy capital goods, but also to buy goods and services.
An example of capital has been added – ovens that are used to bake loaves of bread.
A more detailed explanation of entrepreneurs and their role in economic growth has been
included.
There are now questions and problems at the end of each chapter where the questions are
analytical and open-ended while the problems are focused on computations.
, There are no longer questions that are designated as Key Questions.
Web based questions have been removed from each chapter and students are directed to
the book’s online learning center for questions that require information from the web.
References in graphs, tables, and study questions have been updated to reflect the most
current data available.
INSTRUCTIONAL OBJECTIVES
After completing this chapter, students should be able to:
1. Define economics.
2. Describe the “economic way of thinking,” including definitions of purposeful
behaviour, utility, marginal costs, marginal benefits and how these concepts may be
used in decision-making.
3. Explain how economists use the scientific method to formulate economic principles.
4. Explain the importance of ceteris paribus in formulating economic principles.
5. Explain the steps used by policy makers.
6. Differentiate between micro- and macroeconomics.
7. Differentiate between positive and normative economics.
8. Explain the economizing problem from the individual’s perspective
9. Construct and explain a budget line.
10. Describe the economizing problem facing society.
11. Identify types of economic resources and types of income associated with various
factors.
12. Construct a production possibilities curve when given appropriate data.
13. Illustrate economic growth, unemployment and underemployment of resources, and
increasing costs using a production possibilities curve.
14. Give some real-world applications of the production possibilities concept.
15. Summarize the general relationship between investment and economic growth.
16. Explain and give examples of the fallacy of composition, post hoc fallacy, and other
logical pitfalls. (Last Word)
17. Explain and illustrate a direct relationship between two variables, and define and
identify a positive sloping curve. (Appendix)
18. Explain and illustrate an inverse relationship between two variables, and define and
identify a negative slope. (Appendix)
19. Identify independent and dependent variables. (Appendix)
20. Define and identify terms and concepts listed at end of chapter and appendix.
, COMMENTS AND TEACHING SUGGESTIONS
1. This chapter and related classroom activities will set the tone for the rest of the
course. The methods used in the initial class meetings set the expectations and
attitudes of the students. Making dramatic changes later can be confusing and the
outcome less successful than desired. Please refer to the “Getting Started” section in
the introduction for detailed suggestions. If you plan to make current events an
integral part of the class, consider offering educational subscriptions to The Globe and
Mail, or one of the weekly news or business publications such as The Economist.
2. On the level of personal decision-making, students might be asked to list all of the
economic choices they had to make that day or that week. This impresses upon them
that, as Alfred Marshall said in the 1890s, “economics is the study of man in the
ordinary business of life.” To illustrate the rational basis of their decisions, students
could analyze one or two of these choices in terms of the alternatives they gave up.
What other choices did they have? What criteria were used to judge the alternatives?
A discussion of how rational our decisions are might also follow, providing an
opportunity to introduce problems such as imperfect information and short v. long-
term objectives.
3. There are many dimensions to the topic of “utility” that introductory students will
benefit from contemplating. With these many dimensions comes the danger in taking
students too deep too quickly. It is useful for students to understand that utility may
be obtained both through material and nonmaterial means. Accordingly, it may be
difficult to express how much one is willing to pay (or otherwise sacrifice) to obtain
utility through a given activity.
When discussing rational behaviour, and seemingly irrational decisions, is may be
useful to point out that for some people their utility is interdependent. You can have
a bit of fun telling students that economists define love as “strongly interdependent
utility functions.” The main point, of course, is that there are many situations where
people obtain utility through seeing others having material and nonmaterial wants
satisfied. Likewise, some gain utility from watching others suffer, even if it means
that they are themselves worse off in material terms.
If a question arises about the measurement of utility, the distinction between cardinal
and ordinal utility can be made, but there is little to be gained from an elaborate
discussion. Students may find it interesting that Jeremy Bentham (whom they meet in
Origins web-button 1.2) envisioned some sort of “util-o-meter,” a contraption that
one might strap to the head to record brain waves in an attempt to measure utility
from an activity. Even suggesting that one might use “utils” as a measure of
satisfaction often amuses students and helps them better recall this topic.
4. As the text suggests, it may be useful to discuss several non-economic examples to
illustrate the importance of models or simplification – for example, explaining that a
road map is a model or simplification of the real world. The amount of detail on any
road map would be determined by the needs of the traveler, i.e., “I need to travel
between Winnipeg and Regina as quickly as possible,” versus, “I would like to visit
some historical museums as I am traveling through Nova Scotia.” Neither road map
, would have the details of the real world. Devoting some time and effort to this point
can help students see the importance of using economic models to represent the real
world. You may wish to use the AAI piece below (previously on the web site).
Concept Illustration -- Abstractions and Models
"What do you consider the largest map that would be really useful?"
"About six inches to the mile."
"About six inches!" exclaimed Mein Herr. "We very soon got six yards to the
mile. And then came the grandest idea of all! We actually made a map of the
country on a scale of a mile to a mile!"
"Have you used it much?" I enquired.
"It has never been spread out yet," said Mein Herr. "The farmers objected. They
said it would cover the whole country and shut out the sunlight!"
Lewis Carroll
Silvie and Bruno, 1889
In many ways, good economic models are like good maps. Both are abstractions that
purposely leave out irrelevant facts and circumstances. Both are useful and practical
because they simplify complex realities.
Maps not only help us understand geographical relationships but also serve as
useful tools. A road map of Canada, for instance, helps us understand where Prince
Edward Island is located relative to Manitoba. It also is highly practical in helping us
drive between Saskatchewan and British Columbia.
In much the same way, economic models are helpful and useful. For example, a
model indicating how consumers respond to a change in a product’s price helps us
understand a significant facet of human behaviour. That model also is highly
practical; among other things, it identifies the primary way a business can
reduce an overstock of unsold goods.
The appropriate map or appropriate economic model is the simplest one that
accomplishes a specific goal. Although we may need a highly detailed street map of
Montreal to find a specific residence there, we need only a general road map to drive
between Montreal and Quebec City. Similarly, we need a highly complex, detailed
economic model to predict the economic effects of a general reduction of Canadian
tariffs (taxes on imported goods) on the relative outputs of various Canadian
