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Economic Theory

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The Role of Theory• Economists develop theories, or ________________

to help explain economic behavior. • An economic theory is a simplification of economic

reality that is used to make ________________ about the real world, such as what happens to the consumption of Pepsi when its cost increases.

• To help develop theory, economists make simplifying assumptions. One category of this is the other things _______________________ assumption. This involves identifying and focusing on a variable and assumes nothing else of importance changes.

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The Role of Theory (continued)• Economists also make assumptions about what

motivates people – how people behave. These are called ______________ ___________________.

• The most basic behavioral assumption is that people make choices based on ______________________.

• Rational self interest means that you try to maximize the expected ____________________ achieved with a given cost, or to minimize the expected _______________ of achieving a given benefit.

• Rationality implies that each consumer buys the products expected to maximize his or her level of ________________ and that each firm supplies the products expected to maximize that firms _________

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Normative vs. Positive

• A positive economic statement is a statement about economic reality that can be supported or rejected by reference to the ____________.

• A normative economic statement reflects someone’s __________________ .

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Marginal Analysis • Marginal means _____________________,

additional, extra or one more. • A rational decision maker will change the

status quo as long as the expected marginal benefit from the change _______________ the expected marginal cost.

• Rational choice takes time and requires _________________________.

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Market Economics and National Economics

• ________________________ focuses on your economic behavior and the economic behavior of others who make choices involving what to buy and sell. Microeconomics is another term for market economics.

• __________________________ focuses on the performance of the economy as a whole, especially the national economy. Macroeconomics is another term for national economics.

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Market Participants

• There are four types of decision makers in the economy– 1.– 2– 3– 4

• __________________ play the leading role in the economy.

• ___________________ are the means by which buyers and sellers carry out exchange.