Basic Economic Theory
Key Concept of Basic Economic Theory
• Economic Sectors
Basic + Non Basic Employment
• Economic Base Multiplier
Total Employment / Basic Employment
Basic Economic Theory
• Standard Industrial Classification System
• Location Quotient
Total Industry Local / Total Local Employ
Nation Industry Total / National Total Employ
Basic Economic Theory
The rate at which supply is reduced over a
given time period.
Answers the “how” of demand. Otherwise
known as supply based market analysis
• Bounded Rationality:
Rationality of individuals is limited by the
information they have, the cognitive
limitations of their minds, and the finite
amount of time they have to make decisions.
• Heuristics = Hacks
Experience-based techniques for problem
solving, learning, and discovery that give a solution
which is not guaranteed to be optimal.
• speed up the process of finding a satisfactory
solution via mental shortcuts
• ease the cognitive load of making a decision
• rule of thumb, an educated guess, an intuitive
judgment, stereotyping, or common sense
• Diminishing Utility
Example: More happiness with each beer you drink.
After several beers happiness increases but not at
the same rate. Last beer has a lower amount of
happiness gain. If you continue to consume, you
may even cross over into declining happiness, as
you get sick.
Question: Can Money buy happiness?
(But only up to a certain point )
• Irrational exuberance
Unsustainable investor enthusiasm that drives
asset prices up to levels that aren't supported
What happens when exuberance occurs?
• Herding Behavior
The tendency for individuals to mimic the
actions (rational or irrational) of a larger
group. Individually, however, most people
would not necessarily make the same choice.
• Relative Positioning
How you compare to others
• Loss Aversion
the tendency for people to strongly prefer
avoiding losses than acquiring gains. Some
studies suggest that losses are as much as
twice as psychologically powerful as gains
• losses loom larger than corresponding gains
• Example of Loss Aversion
• Lets say a deal is going to increase your income by
$200. But in order to gain that surplus you have to
also go through a loss. So you gain $1,200 from the
deal and then you lose $1,000. You are still up $200
but many won’t want to take that deal because they
don’t like the feeling they are left with of losing the
$1000. And the same thing happens when you
introduce probabilities into the equations.
Example of Loss Aversion
• If you are 90% possible you are going to gain
$1,000 and 10% possible you are going to gain
$0, the mathematical gain calculate would be
$900. Now let’s say you had a comparable
deal in which you were only going to gain
$800, but it is 100% possible. More people will
choose the $800 over the $900 because of
loss aversion and risk heuristics.
• Strike a deal
• You keep the % of the deal you strike
But if no deal is made, both get nothing
• Why didn’t you offer a lower % ?
• Define “Fair”
• Did you maximize your wealth options?
Conventional economics predicts and insists that
responder will accept any offer because any above
zero increases responders income. And proposer will
offer 1%. Behavioral Economics suggest a deal that
both can gain from and avoid 100% loss.
Basic Economic Theory + Behavioral Economics=
• How to calculate demand?
• Demand Triggers
• Demand Matrix
• Study of characteristics in an
• Hard facts and external
• Age, Sex, Income, Race, etc.
• Used as a forecast for local and national
• Demonstrate when an economy expands and
• Different indicators will be looked at for
different asset or investment types
• Consumer Confidence
• Sensory component
• Categorization about how you feel about
something. VAL System
• The key to understanding what motivates a
• Survey method
• Social Interactions
• Data Mining Companies
• Search Engines
•Highest incomes, high self-esteem
•Expression of taste
•Consumer choices are "finer things”
•High-resource group and
•World views, open to change
•Practical consumers and rational
•Conservative and predictable consumers
•Favor American products and brands
•Focused on family, community,
•Motivated by achievement and work-oriented
•satisfaction from jobs and families
•Respect authority and status quo
•Favor established products and services that
show off their success to their peers.
•Motivated by achievements
•Values very similar to achievers
•Have fewer economic and social, and
•Style is extremely important
•Strive to emulate people they admire
•Median age of 25.
•Energy, physical exercise, social activities
•Avid consumers, spending on clothing, fast-
foods, music, etc.
•Emphasis on new
products and services
•Practical people who
•Focused on the familiar-family, work, and
•Have little interest in the broader world.
•Appreciate practical and functional products
•median age of 61
•tend to be brand-loyal consumers