Economics Unveiled: Theories, Invisible Hand, and Institutions

Economic Insights - Theories tie together economists’ terminology and knowledge about economic institutions - Theories are too abstract to apply in specific cases and are often embodied in economic Models and principles - An economic model is a framework that places the generalized insights of the theory in A more specific contextual setting - An economic principle is a commonly held insight stated as a law or general Assumption - Theories, models, and principles are continually tested to see of the predictions of the model Match the data. - Models lead to - Theorems (propositions that are logically true based on the assumptions of the model) - To arrive at policy precepts (policy rules that conclude that a particular course of action Is preferable) - These theorems must be combined with knowledge of real-world economic institutions and Value judgements to determine economic goals of society. The Invisible Hand Theory - According to the invisible hand theory, a market economy, through the price mechanism, Will allocate resources efficiently. - Prices fall when quantity supplied is greater than quantity demanded - Prices rise when the quantity demanded is greater than the quantity supplied - Efficiency means achieving a goal as cheaply as possible

Microeconomics and Macroeconomics - Economic theory is divided into two parts - Microeconomics is the study of individual choice, and how that choice is influenced by Economic forces - Macroeconomics is the study of the economy as a whole - Microeconomics studies such things as - The pricing of policy firms - Household’s decisions on what to buy - How markets allocate resources among alternative ends - Macroeconomics studies such things as - Inflation - Unemployment - Economic growth Economic Institutions - To apply economic theory to reality , you’ve got to have a sense of economic institutions - Economic institutions are laws, common practices, and organizations in a society that Affect the economy. - Economic institutions differ significantly among nations - They sometimes seem to operate differently than economic theory predicts