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Understanding Economic Theory: Concepts and Analysis

Learn the fundamental principles of economic theory and reasoning, including the role of marginal analysis and how market participants interact. Explore key terms and concepts in contemporary economics.

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Understanding Economic Theory: Concepts and Analysis

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  1. Standard Address 1.2 - Objectives 12.1 Students understand common terms & concepts and economics reasoning. • Explain the goal of economic theory. • Understand the role of marginal analysis in making economic choices. • Explain how market participants interact.

  2. A BULLDOG ALWAYS Commitment Attitude CARES Respect Encouragement Safety

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

  4. 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

  5. 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 other-things-constant assumption. • Focus on one variable. CONTEMPORARY ECONOMICS: LESSON 1.2

  6. 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. CONTEMPORARY ECONOMICS: LESSON 1.2

  7. Economic Theory • Everybody uses theories • Pounding on a vending machine is a theory • Economists tell stories • To explain their economic theories. CONTEMPORARY ECONOMICS: LESSON 1.2

  8. 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. CONTEMPORARY ECONOMICS: LESSON 1.2

  9. 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 CONTEMPORARY ECONOMICS: LESSON 1.2

  10. Checkpoint Pg. 13 Explain the goal of economic theory? The goal of economic theory is to explain why and how the economy works. CONTEMPORARY ECONOMICS: LESSON 3.1

  11. Marginal Analysis • Marginal – Incremental additional, extra, or one more, refers to a change in an economic variable, a change in the status quo CONTEMPORARY ECONOMICS: LESSON 1.2

  12. 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. CONTEMPORARY ECONOMICS: LESSON 1.2

  13. 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. CONTEMPORARY ECONOMICS: LESSON 1.2

  14. 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. CONTEMPORARY ECONOMICS: LESSON 1.2

  15. 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. CONTEMPORARY ECONOMICS: LESSON 3.1

  16. 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. CONTEMPORARY ECONOMICS: LESSON 1.2

  17. Markets • Markets are the means by which buyers and sellers carry out exchange. CONTEMPORARY ECONOMICS: LESSON 1.2

  18. Markets • Product markets • Goods and services are bought and sold in product markets CONTEMPORARY ECONOMICS: LESSON 1.2

  19. Markets • Resource markets • The most important resource market is the labor, or job market CONTEMPORARY ECONOMICS: LESSON 1.2

  20. Would you like to super size that? CONTEMPORARY ECONOMICS: LESSON 1.2

  21. 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

  22. Circular-Flow Model CONTEMPORARY ECONOMICS: LESSON 1.2

  23. 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. CONTEMPORARY ECONOMICS: LESSON 3.1

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