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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. 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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  1. 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

  2. Key Terms LESSON 1.2 Economic Theory economic theory marginal market economics national economics market CONTEMPORARY ECONOMICS: LESSON 1.2

  3. 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

  4. 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

  5. Marginal Analysis • Compare marginal cost with marginal benefit • Choice requires time and information • Market economics and national economics CONTEMPORARY ECONOMICS: LESSON 1.2

  6. Market Participants • Four types of participants • Households • Firms • Governments • The rest of the world CONTEMPORARY ECONOMICS: LESSON 1.2

  7. Markets • Markets are the means by which buyers and sellers carry out exchange. • Product markets • Resource markets • Labor market CONTEMPORARY ECONOMICS: LESSON 1.2

  8. 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

  9. Circular-Flow Model CONTEMPORARY ECONOMICS: LESSON 1.2

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