Foundations of Economic Analysis

Abstract

This chapter introduces standard concepts of economic modeling, with examples of two basic economic models—the neoclassical model, which has dominated much of standard economics, and the contextual model, which is the approach taken in this text. In the contextual model, economic activity is described as being embedded in social and physical contexts and taking place within three spheres—core, business, and public purpose. The chapter also discusses the various definitions and institutional requirements of markets and introduces the concepts of externalities, public goods, market power, transaction costs, information and expectations. Overall, the chapter presents the perspective that efficiency goals should be balanced with a concern for human needs and equity and that markets, while essential to economic productivity, are not on their own sufficient for organizing economic life in the service of well-being. An online Appendix includes a review of graphing techniques.

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