1. Economic Theory
Chapter 1.2

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.

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

4. 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?

5. Everybody Uses Theories!

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

7. 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

8. 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

9. 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