1. Economic Theory
Chapter 1.2

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

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

4. Everybody Uses Theories!

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

6. 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

7. 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

8. Circular Flow Model