Lesson 1 2 economic theory
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Objectives. LESSON 1.2 Economic Theory. Explain the goal of economic theory. Understand the role of marginal analysis in making economic choices. Explain how market participants interact. Key Terms. LESSON 1.2 Economic Theory. economic theory marginal market economics

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LESSON 1.2 Economic Theory

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Lesson 1 2 economic theory

Objectives

LESSON 1.2 Economic Theory

Explain the goal of economic theory.

Understand the role of marginal analysis in making economic choices.

Explain how market participants interact.

CONTEMPORARY ECONOMICS: LESSON 1.2


Lesson 1 2 economic theory1

Key Terms

LESSON 1.2 Economic Theory

economic theory

marginal

market economics

national economics

market

CONTEMPORARY ECONOMICS: LESSON 1.2


The role of theory

The Role of Theory

  • An economic theory is a simplification of economic reality that is used to make predictions about the real world

CONTEMPORARY ECONOMICS: LESSON 1.2


Economic theory

Economic Theory

  • Simplify the problem

  • Simplifying assumptions

  • Rational self-interest

  • Everybody uses theories

  • Economists tell stories

  • Normative versus positive statements

CONTEMPORARY ECONOMICS: LESSON 1.2


Marginal analysis

Marginal Analysis

  • Compare marginal cost with marginal benefit

  • Choice requires time and information

  • Market economics and national economics

CONTEMPORARY ECONOMICS: LESSON 1.2


Market participants

Market Participants

  • Four types of participants

    • Households

    • Firms

    • Governments

    • The rest of the world

CONTEMPORARY ECONOMICS: LESSON 1.2


Markets

Markets

  • Markets are the means by which buyers and sellers carry out exchange.

    • Product markets

    • Resource markets

      • Labor market

CONTEMPORARY ECONOMICS: LESSON 1.2


A circular flow model

A Circular-Flow Model

  • A circular-flow model describes the flow of resources, products, income, and revenue among economic decision makers.

CONTEMPORARY ECONOMICS: LESSON 1.2


Circular flow model

Circular-Flow Model

CONTEMPORARY ECONOMICS: LESSON 1.2


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