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Economic Theory 1.2

Economic Theory 1.2. Objectives: Explain the goal of economic theory Understand the role of marginal analysis Explain how market participants interact (Circular-flow model). Key Terms. Economic theory – economic model Marginal Market Economics (micro ) National Economics ( macro )

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Economic Theory 1.2

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  1. Economic Theory 1.2 Objectives: Explain the goal of economic theory Understand the role of marginal analysis Explain how market participants interact (Circular-flow model)

  2. Key Terms • Economic theory – economic model • Marginal • Market Economics (micro) • National Economics (macro) • Market

  3. Everybody uses theories

  4. Economic Theory • Predict what ppl will do Example: How does the consumption change when the price changes? • Simplify economic reality to make sense of things • Other things constant: assume only 1 thing changes at a time. • Explain how & why the economy works

  5. Making economic Choices • Do people ever act of complete selflessness?

  6. Rational self-interest – (behavioral assumptions) you make choices based on your best self-interest and based on information available

  7. How do we make economic decisions? • Behavioral Theory: how ppl act • Rational self interest: we want to Maximize benefit & Minimize cost

  8. Checkpoint • Explain the goal of economic theory

  9. What would you do? • Clean class after school Reward: • 20 mins - 1 movie ticket • 40 mins - 2 movie tickets • 60 mins - 3 movie tickets • 80 mins - 4 movie tickets

  10. Marginal: Change by increment: one more, extra, additional • “Marginal benefit: w/each additional unit, what is the EXTRA benefit? • Marginal cost: w/each additional unit, what is the EXTRA cost? • Few choices are “all or nothing” Decisions.

  11. Marginal cost & benefit • Buy 4 tacos, get the 5th for free! • MC: • MB: • Buy one pair of jeans, get the second at 50% off! • MC: • MB: Rational self-interest: Would most ppl buy 5 tacos: Would most ppl buy 2 pairs of jeans?

  12. Your Grades – time spent studying • 1 hour of studying - Earn a D • 2 hours of studying - Earn a C • 4 hours of studying - Earn a B • 6 hours of studying - Earn an A • How much time would your spend studying? Why?

  13. Checkpoint • Describe the role of marginal analysis in making economic choices.

  14. Markets • Market economics (microeconomics) • National economics (macroeconomics)

  15. Market Participants • 4 types (decision makers). Their interaction determines how an economy’s resources get allocated. • Households • Firms • Governments • The rest of the world.

  16. Circular-Flow Model • A circular-flow model describes the flow of resources , products, income, and revenue among economic decision makers. • Page 16 of text

  17. Circular-Flow Model CONTEMPORARY ECONOMICS: LESSON 1.2

  18. Checkpoint • How do market participant interact?

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