Econ 1 EC 201 Allison Lowe Reed NCSU

Economics

Study of how people and firms make choices to use scarce resources

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

opportunity cost

The highest-valued alternative that must be given up to engage in an activity

Three Fundamental Economic Questions

1. What to produce?

2. How to produce?

3. For whom to produce?

Absolute Advantage

Ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

comparative advantage

Ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

Law of Diminishing Marginal Utility

Consumers experience less and less additional satisfaction as they consume more of a good/service during a given period of time

law of diminishing returns

- Adding more of a variable input to the same amount of a fixed input will cause the marginal product to increase, then decline

- The pizza oven eventually becomes full, therefore, if you shove enough in, you will have leftover pizzas to put into the oven

Demand

The willingness and ability to buy certain quantities of a good or service at different prices

Law of Demand

For all normal goods if price goes up, quantity demanded goes down, ceteris paribus

substitution effect

Good becomes more or less expensive relative to substitute

Decrease in demand

Shifts in (left)

Increase in demand

Shifts out (right)

5 determinants of demand

- Income

- Taste and preferences

- Expectations of future goods

- Prices of relative goods (substitute and compliments)

- Number of buyers

Income increases

Demand increases

Inferior goods

demand decreases as income increases

Normal goods

Demand increases as income increases

Tastes become more popular

demand increases

Expectations of future goods goes up

demand increases

price of a substitute good goes up

demand increases

price of compliment increases

demand decreases

Number of buyers increases

demand increases

Supply

the willingness and ability of producers to offer a good or service for sale at different prices

Law of supply

as price increases, quantity supplied increases

5 determinants of supply

- Price of inputs

- Technology

- Expectation of future prices

- Number of sellers

- Price of substitute goods in production

price of input increases

supply decreases

advance in technology

supply increases

expected prices go up

supply decreases

Number of sellers increase

supply increases

Price of substitute good in production increases

supply decreases

Market

where buyers and sellers come together to trade

equilibrium price

quantity demanded equals quantity supplied

When demand increases

price and quantity increase

when demand decreases

price and quantity decrease

When supply increases

Price goes down and quantity increases

When supply decreases

price goes up, quantity goes down

Substitute goods

are two alternative goods that could be used for the same purpose

Complementary goods

Appeal increases with popularity of its compliment (PS4 games with the PS4)