Warm-Up Estimate the per night price of staying in both of these hotels. What made you guess these prices?

Reading Quiz Define a “economic theory.” 2.What is rational self-interest? 3.Who are the four market participants? 4.True or False: People will choose to make a change when COST is greater than BENEFIT.

Economic Theory Chapter 1.2

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

Simplifying Assumptions 1.Other-things-constant Assumption – i.e. How much water is required for daises to grow? 1.Behavioral Assumptions – Rational Self-Interest: people make best choices they can given available information

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

Circular Flow Model