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

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CONTEMPORARY ECONOMICS: LESSON 1.23 LESSON 1.2 Economic Theory  economic theory  marginal  market economics  national economics  market Key Terms

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 1.24 The Role of Theory  An economic theory is a simplification of economic reality that is used to make predictions about the real world

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 1.25 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.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 1.26 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.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 1.27 Economic Theory  Everybody uses theories  Pounding on a vending machine is a theory  Economists tell stories  To explain their economic theories.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 1.28 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.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 1.29 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

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Explain the goal of economic theory?  The goal of economic theory is to explain why and how the economy works. Checkpoint Pg. 13

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Marginal Analysis  Marginal – Incremental additional, extra, or one more, refers to a change in an economic variable, a change in the status quo

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 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.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 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.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 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.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 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. Checkpoint Pg. 14

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 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.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Markets  Markets are the means by which buyers and sellers carry out exchange.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Markets  Product markets  Goods and services are bought and sold in product markets

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Markets  Resource markets  The most important resource market is the labor, or job market

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Would you like to super size that?

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON A Circular-Flow Model  A circular-flow model describes the flow of resources, products, income, and revenue among economic decision makers.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Circular-Flow Model

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 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. Checkpoint Pg. 16