Economic Theory Chapter 1.2

Review With Your Partner 1. What are the three productive resources? 2. Give an example of a natural resource? 3. What is the fundamental economic problem? 4.Why are things scarce in society? 5. What are the three economic questions? 6. Give an example of a capital resource? 7. What is a good? 8. Give an example of a service? 9. Name 10 Disney movies.

Economic Theory Economic model/theory: Simplification of economic reality to make predictions about the real world. = $$$$$$$$ = $

Simplifying Assumptions Behavioral Assumptions: Rational Self-Interest: people make the best choices they can given available time and information How is this going to benefit me and my family?

Everybody Uses Theories!

Marginal Analysis People make economic choices by comparing the expected cost with the expected benefit. MARGINAL: additional Marginal change can be big or small

Marginal Analysis cont’d Rational decision makers will change the status quo as long as the expected marginal benefit EXCEEDS the expected marginal cost Dumb phone or smart phone? CHOICES: require time and information

With a partner… Talk about an economic choice you have made by weighing the costs and benefits. Did the benefit outweigh the cost, or vice-versa? Next: Circular Flow Model

Resource Market DEMAND SUPPLY Individuals Businesses Government SUPPLY $$$ Income $$$ (Factor payments) $$$ Costs $$$ Resources Resources (Factors of Production) $$$ Taxes Taxes Subsidies Transfer Payments Public Goods Public Goods Individuals Businesses Government $$$ Goods and Services Goods and Services $$$ Revenue $$$ SUPPLY $$$ Spending $$$ DEMAND Product Market 9 Copyright ACDC Leadership 2015