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Economic Theory

simplified, often mathematical, framework designed to illustrate complex
processes.
We frequently use models in sciences such as chemistry and physics.
Think of the model of an atom, with the atomic particles: neutron, proton,

and electrons. No one has ever seen an atom, but there is significant
evidence for this model. It is easy to be critical of economic models, since

we are more familiar with economic events.
Both micro and macroeconomics are explained in terms of theories
and models. The most well known theories are probably those of supply
and demand, but you will learn a number of others.

Case Study 1

Microeconomics in a Fast-Food Restaurant

You watch another customer go to the counter and place an order. She
purchases some fried chicken, an order of fries, and a Coca-Cola. The cost
is €10. She hands over a bill and gets the food in exchange. It is a simple

transaction; you have witnessed exchanges like it thousands of times
before. Now, though, you think about the fact that this exchange has made
both the customer and the store better off than they were previously. The
customer has voluntarily given up money to get food. Presumably, she

would do this only if having the food makes her happier than having the
€10. KFC, meanwhile, voluntarily gave up the food to get the €10.
Presumably, the managers of the store would sell the food only if they

benefit from the deal as well. They are willing to give up something of
value (their food) in exchange for something else of value (the customer’s
money).

Think for a moment about all the transactions that could have taken
place but did not. For the same €10, the customer could have bought two
orders of fried chicken. But she didn’t. So even though you have never met

the person, you know something about her. You know that – at this
moment at least – she prefers having a Coca-Cola, fries, and one order of
fried chicken to having two orders of fried chicken. You also know that
she prefers having that food to any number of other things she could have

bought with those euros, such as a movie theater ticket, some chocolate
bars, or a book.

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