1. 1.2 Economic Theory Lesson Objectives:
We’ll explain the goal of economic theory
Discuss what is meant by marginal analysis
Talk about what a market participant is.
Distribute copies of the glossary and ask students to go to look up and write up vocab. Now that you have a copy of the glossary, you will be asked to complete your vocab at the beginning of each chapter. It is an easy homework grade. Put the glossary somewhere safe. 1st day full credit possible, lose 10 points per day late. 3 days no credit.
Put on the board:
An economy results from the choices that millions of individuals make in attempting to satisfy their unlimited wants and needs.

2. The Role of Theory
Economists develop theories, or models, to help explain economic behavior.
An economic theory is a simplification of economic reality that is used to make predictions 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 constant assumption. This involves identifying and focusing on a variable and assumes nothing else of importance changes.
Distribute the Student fill in copy and have students search through p. 11 to fill in the blanks.

3. The Role of Theory (continued)
Economists also make assumptions about what motivates people – how people behave. These are called behavioral assumptions.
The most basic behavioral assumption is that people make choices based on self-interest.
Rational self interest means that you try to maximize the expected benefit achieved with a given cost, or to minimize the expected cost of achieving a given benefit.
Rationality implies that each consumer buys the products expected to maximize his or her level of satisfaction and that each firm supplies the products expected to maximize that firms profit.
Self interest does not mean selfishness. It usually means you are considering benefit as it related to you and your family’s interest or your friends, or the poor of the world. Your concern for others is influenced by your personal cost of that concern. So, you may wish to volunteer in a coup kitchen, but in the afternoon rather than the early morning so that you can sleep late. People tend to give more to charity when their contributions are tax deductible.
This will become very important when we discuss supply and demand. When we talk about supply, we look at it from the perspective of the suppliers interests, and we discuss demand from the perspective of the consumers interest. 3

4. Normative vs. Positive
A positive economic statement is a statement about economic reality that can be supported or rejected by reference to the facts.
A normative economic statement reflects someone’s opinion.
Can go through question 5 p. 17 together to check for understanding.
Now that we’ve discussed Marginal Cost and Benefit, read the article on p. 11 “The rational choice is to stay home from work” and answer the questions at the end. They are your opinion, but we will discuss at the end. It’s a really good article.

5. Marginal Analysis
Marginal means incremental, additional, extra or one more.
A rational decision maker will change the status quo as long as the expected marginal benefit from the change exceeds the expected marginal cost.
Rational choice takes time and requires information.
Read page 13 first paragraph under marginal analysis aloud.
Review – status quo means the current situation.
Rational choice needs time and information. Best example of this is you go out to buy a car, you don’t walk onto a lot and just grab one, or do you shop around, look at different models, etc and investigate how you are going to spend this large amount of money.
You have an important choice to make as a senior in the end of the year. What is it? You’ll dedicate some time to thinking it over and weighing the benefits of going to college or a trade school. If you decide to go, you may look at a catalogue or go to visit a campus. 5

6. Market Economics and National Economics
Microeconomics 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.
Macroeconomics focuses on the performance of the economy as a whole, especially the national economy. Macroeconomics is another term for national economics.
Give an example:
Micro we talk about what people like you and me are buying. Micro relates to our personal finance class for those of you who are currently taking PF.
Macro includes all of the major indicators that measure the national economy. For example you may have heard the acronym GDP, or gross domestic product. It is the sum of all of the products and services produced in the US in one year. We’ll talk more about GDP and how it’s arrived at later in the year.
Have students read the article on p. 10 “How Now Dow”. Show them an episode of CNN marketwatch on the smartboard.

7. Market Participants
There are four types of decision makers in the economy
1. businesses
2. government
3. households
4. the rest of the world
Households play the leading roel in the economy.
Markets are the means by which buyers and sellers carry out exchange.
Households provide the resources to produce goods and services.
Markets can be physical places, product markets, resource markets or labor or job markets. Participants are sellers as well as buyers in the market. People, or households sell their labor. Governments sell the rights to travel on toll roads, and businesses sell the goods and services they produce domestically and sometimes internationally.
You learned a basic premise in this section: An economic theory is also called an economic model. Economists use them to make generalizations and predictions about what will happen in the real world.
Ask class why is it important to make predictions? Because they can influence the direction you take including whether it’s the right time to change jobs, invest or make a large scale purchase. Once again Knowledge is Power.