Basics: Economic Theory

Economic Theory- simplification of economic reality used to make predictions about the real world

Three things to Remember:

• Simplify the problem
• Use simplifying assumptions
• Ceteris paribus, behavioral

• People always act in their own rational self-interest
• positive vs. normative 

positive: a statement about reality that can be supported or rejected by referencing facts. (what is)

• cause and effect 
• avoids value judgments 

normative:  a statement of opinion. (what should be)

• value based assessments
• economic policy  

Types of Economics
Microeconomics (market economics)

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• Study of economic behavior in individual markets

Macroeconomics (national economics)

• Study of the economic behavior of the market as a whole, especially on the national level

Marginal Analysis

• Marginal = extra, additional
• When making a decision, consider marginal benefit vs. marginal cost
• when people think rationally they are thinking at the margins.
• (what extra is gained versus what is given up...opportunity cost)