101chapter4 - Chapter 4. Economic Theory, Chapter 4....

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Unformatted text preview: Chapter 4. Economic Theory, Chapter 4. Economic Theory, Markets, and Government Markets, and Government Economic Theory Market Failure The Role of Government I. Economic Theory I. Economic Theory Elements objectives constraints choices objectives objectives what do we want to do? people: maximize satisfaction firms: max. profits gov't: max. re-election or budget constraints constraints limits on how we achieve objectives physical (PPC) financial (budget constraint) legal (property rights) choices choices a statement about likely choice law of demand law of supply key assumption key assumption people are rational people make best decision give their objectives and constraints rational decisions are consistent forward-looking rationality rationality full use all available info when making decisions bounded limited ability to process information rationality & objectives rationality & objectives self-regarding preferences maximize own satisfaction other-regarding preference max. own and others' satisfaction care what others think combine theory with observation simplest theory, consistent with observation (Ockham's razor) Theory vs. observation Theory vs. observation What if observations do not match What if observations do not match theory?...
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101chapter4 - Chapter 4. Economic Theory, Chapter 4....

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