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