Economic Thoery Essay

1879 WordsMar 11, 20128 Pages
Economic theory is divided into two main branches of analysis: macroeconomics and microeconomics. Macroeconomics studies aggregates, such as the economy as a whole. It deals with nationwide events, such as business cycles, changes in prices, unemployment, and economic growth. Microeconomics is the branch of economics that deals with decisions made by individuals, households, and businesses. Macroeconomics looks at the forest, while microeconomics looks at the trees. Economics uses models to simplify real-world situations so that we can understand and predict how things will happen in the real world. The Economic Person: Rational Self-Interest as a Motivator Economic theory assumes that people are primarily motivated by self-interest and respond predictably to events for personal gain. The rationality assumption in economics states that people will not knowingly commit to decisions that would leave them worse off. People will also respond to incentives. Incentives are the rewards for taking part in some activity. People assess incentives by analyzing the costs versus the benefits of taking a certain course of action. If the benefit of doing an activity is greater than the cost, then economic theory would advise that activity be done. In economics, self-interest can be defined as the pursuit of objectives that make individuals better off. Normative versus Positive Economics Normative economic statements are about what someone believes ought to be. They involve value judgments that usually contain the phrases "ought to be" or "should be" in them. Positive economics, on the other hand, deals with what actually is. Positive statements are "if-then" statements. Because positive statements deal with the effects of actions, economists use them to predict the consequences of various decisions to assess whether the decisions assist in reaching desired objectives.

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