Warm-UpEstimate the per night price of staying in both of these hotels. What made you guess these prices?
Reading Quiz 1.2
1. 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 TheoryEconomic 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