Transcript 1.2 Economic Theory

Standard Address
 12.1 Students understand common terms
& concepts and economics reasoning.
1.2 - Objectives
 Explain the goal of economic theory.
 Understand the role of marginal analysis
in making economic choices.
 Explain how market participants interact.
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Key Terms
LESSON 1.2
Economic Theory
 economic theory
 marginal
 market economics
 national economics
 market
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The Role of Theory
An economic
theory is a
simplification of
economic reality
that is used to
make predictions
about the real
world
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Economic Theory
Simplify the problem
The more detailed a theory
gets the more difficult to
understand it becomes, and
the less useful it may be.
Simplifying assumptions
One category of
assumptions is the otherthings-constant assumption.
Focus on one variable.
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Economic Theory
Rational self-interest
By rational, economists mean
that you try to make the best
choices you can, given the
information available.
In general, rational self-interest
means that you try to
maximize the expected benefit
achieved with a given cost or
to minimize the expected cost
of achieving a given benefit.
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Economic Theory
Everybody uses
theories
Pounding on a
vending machine is a
theory
Economists tell
stories
To explain their
economic theories.
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Economic Theory
Normative versus
positive statements
A positive economic
– is a statement about
economic reality that
can be supported or
rejected by references
to facts.
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Economic Theory
Normative versus
positive statements
A Normative
statement – is a
statement that
reflects someone’s
opinion that cannot
be shown to be true
or false by facts.
Beauty is in the eye of the beholder
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Checkpoint Pg. 13
Explain the goal of economic
theory?
 The goal of economic theory is to
explain why and how the economy
works.
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Marginal Analysis
Marginal – Incremental additional, extra,
or one more, refers to a change in an
economic variable, a change in the status
quo
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Marginal Analysis
Compare marginal
cost with marginal
benefit
A rational decision
maker will change the
status quo as long as
the expected
marginal benefit from
the change exceeds
the expected
marginal cost.
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Marginal Analysis
Choice requires time
and information
Rational decision
makers will continue to
acquire information as
long as the marginal
benefit expected from
that information
exceeds the marginal
cost of gathering it.
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Marginal Analysis
Market economics and national
economics
Market economics – study of economic
behavior in particular markets, such as the
markets for computers or for unskilled labor.
National economics – study of economic
behavior of the economy as a whole,
especially the national economy.
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Checkpoint Pg. 14
Describe the role of marginal
analysis in market economic
choices.
 If the marginal benefit of an activity or
purchase exceeds the marginal cost,
then people will choose to do that,
activity or make the purchase.
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Market Participants
There are four types of
decision makers in the
economy:
Firms
Governments
The rest of the world
Households – play the
leading role in the economy.
As consumers, households
demand the goods and
services produced.
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Markets
Markets are
the means by
which buyers
and sellers
carry out
exchange.
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Markets
Product markets
Goods and
services are
bought and sold
in product
markets
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Markets
Resource markets
The most
important resource
market is the
labor, or job
market
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Would you like
to super size
that?
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A Circular-Flow Model
A circular-flow model describes the flow
of resources, products, income, and
revenue among economic decision
makers.
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Circular-Flow
Model
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Checkpoint Pg. 16
How do market participants interact?
 Households supply human resources, natural
resources, and capital goods to firms through
resource markets.
 In return, households demand goods and
services from firms through product markets,
and firms demand human resources, natural
resources, and capital goods from households
through resource markets.
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