Warm-Up
Estimate the per night price of staying in both of these hotels.
What made you guess these prices?
Questions to consider during this
powerpoint
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 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?
2. 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