reading, study guide and sample exam

reading, study guide and sample exam - Choice, Markets,...

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Unformatted text preview: Choice, Markets, & Government Chapter 4 Econ 101.01 Fall 2011 Prof. Michael Potepan Economic theory Theories: analytical tools for understanding, explaining, and making predictions about some phenomenon economic theory is focused on understanding economic phenomenon to analyze: to break something down into its component parts indentifying cause vs. effect relationships The structure of economic theory Three elements of economic theories objectives constraints on opportunities choices Objectives goals or results someone wants to achieve consumer: wants the greatest utility (satisfaction) from their consumption of various goods & services they must choose producer: wants the highest profit from producing and selling a particular quantity of goods & services they must choose politician: wants highest vote total when running for political office in an election The structure of economic theory Constraints on opportunities many opportunities or choices possible to meet an objective but most alternatives are limited or constrained in some way physical constraints only so many hours in a day only so much workspace in a building financial constraints only so much income to purchase goods & services legal or institutional constraints property rights: legal rules establishing how a person can use or control something they own car ownership example The structure of economic theory Choices the outcome of the theory which choice is most likely to be made to achieve the objective given the constraints consumer example objective: to maximize utility constraints: income, prices of goods choice: that combination of goods that yields the highest level of utility given their preferences, income, & prices of goods The structure of economic theory Choices producer example objective: to maximize profits constraints: prices of inputs, technology, current capacity of company choice: particular quantities of some set of goods to produce that yields the highest profit level given input prices, technology, current capacity, etc. The role of rationality in economic theory The rationality assumption is the glue that holds the 3 elements of economic theory together To be rational: acting purposely to achieve an objective rationally choose between alternatives to reach the best result given the existing constraints Rationality assumption is often misunderstood doesnt mean people are always cool and calculating and are not emotional or impulsive does mean that when people are faced with choices, they seek to get the best outcome given the constraints they face The role of rationality in economic theory Ockhams razor simple theories are better than complex theories when both are consistent with facts rational to choose the more straightforward explanation Adjusting a theory when facts do not support it...
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This note was uploaded on 10/12/2011 for the course ECON 101 taught by Professor Pgking during the Spring '08 term at S.F. State.

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reading, study guide and sample exam - Choice, Markets,...

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