Transcript Chapter 1 Section 2 Economics

Chapter 1 Section 2
Economic Theory
Economic Theory
 Economic
model
 Is a simplification of economic reality
that is used to make predictions about
the real world.
 Ex. What happens to the consumption
of Pepsi when its price increases.
Simplify the Problem
 Captures
the important elements of the
problem under study.
 One way to strip down reality is by using
simplifying assumptions.
Simplifying Assumptions

The idea is to identify the variables of interest
and then focus exclusively on the relations
among them, assuming that nothing else of
importance changes- that other things remain
constant.
 Isolate the relationship b/w these two
variables Price and quantity purchasedmodel no other changes in other variables.
 Ex. Pepsi ( consumer income, Price of Coke,
and average outdoor temperature. No
changes to these variables.)
motives people-how they
behave.
 Behavioral Assumption-how
people
behave.
Basic behavioral assumptions is that
people make choices based on their
own self-interest.
Rational Self Interest
 Economists
mean that you try to make
the best choices you can, given the
information available.
Rational
 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.
Continued

The assumption of rational self interest does
not rule out concern for others. It simply
means that concern for others is influenced
to some extent by the same economic forces
that affect other economic choices.
 Ex. The lower your personal cost of helping
others, the more help you will offer.
Every body uses theories
 Vending
machine
 Economists tell stories about how they
think the economy works.
Normative Versus Positive
Statements

Economists sometimes concern themselves
not with how the economy does work but how
it should work.
 Ex.Unemployment rate is 5.8%. The U.S.
unemployment rate should be lower.
 Positive economic statement, b/c it is a
statement about economic reality that can be
supported or rejected by reference to the
facts.
Normative economic
statement
 It
reflects someone’s opinion.
Marginal
 Means
incremental, additional, extra, or
one more.
 Marginal refers to a change in an
economic variable, a change in status
quo.
 Status quo means the existing state of
affairs.
Continued
 A rational
decision maker will change
the status quo as long as the expected
marginal benefit from the change
exceeds the expected marginal cost.
Example
 Compare
the marginal benefit you
expect from eating dessert
 (added satisfaction)
 With its marginal cost
 (the added dollar, cost, time, and
calories).
Example
 Amazon.com
compares the marginal
benefit expected from adding a new
products.
 (the added sales revenue)
 With the marginal cost
 (the added cost of resources required)
Jack n the box

2 tacos for 99 cents
 You normally order 6 tacos, but of the 6 eat
only 5.
 Marginal benefit would be to eat food, taste,
satisfaction
 Marginal cost – money, time, that the value of
the 6th taco is not worth 49 cents it would
cost.
 Food and money would be wasted.
Market economics

Aka Microeconomics-your economic behavior
and the economic behavior of others who
make choices involving what to buy and what
to sell, how much to work and how much to
play, how much to borrow and how much to
save.
 Ex. The factors that influence individual
economic choices and how markets
coordinate the choices of various decision
makers. Ex. cereal
National economics
 Aka
Macroeconomics focuses on the
performance of the economy as a
whole, especially the national economy.
 Ex. Takes a look at all the pieces of the
economy as a whole.
Households
 People
 As
consumers, households demand the
goods and services produced.
 As resource owners, households supply
the resources used to produce goods
and service.
 Reminder Human resources, Natural
resources, Capital Goods
Firms, governments, and the
rest of the world
 Demand
the resource that households
supply, and then use these resources to
supply the goods and services that
households demand.
Markets
 Are
the means by which buyers and
sellers carry out exchange.
 Brings to together supply and demand.
 Supply- a relation showing the
quantities of a good producers are
willing and able to sell at various prices
during a given period, or other things
constant.
continued
– A relation showing the
quantities of a good that consumers are
willing and able to buy at various prices
per period, other things constant.
(shopper)
 Price
 Quantity purchased
 Demand
Continued

Income-salary or wage for human resources.
 Expenditure-the amount of money that people
spend on product or good and services.
 Resources payments - companies have to
pay for their resources. (human resourceslabor, natural resource, capital resourcesbuilding.)
 Revenue -