Econ Final 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

Positive economics

What is (straight facts)

Normative economics

What should or what ought to be (desirability)

Three Fundamental Economic Questions

1. What to produce?

2. How to produce?

3. For whom to produce?

Theory of Comparative Advantage

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

- Specializing in good for which one has a lower opportunity cost then trading for another good can be win-win for both trading partners

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

basis for trade

comparative advantage

Better off if you

Specialize in producing goods and services for which you have comparative advantage and obtain the other goods and services through table

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

Income effect

Consumer's purchasing power changes

Utility Maximization Rule

- consumers decide to allocate their money incomes so that the last dollar spent on each product purchased yields the same amount of extra marginal utility

- Get the most good from each additional product as long as it makes you as happy as the last time you bought it.

- Marginal utility of good a/ price of good a = marginal utility of good b/ price b

Demand Curve

- Negative slope

- Relationship between quantity and price

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)

price ceiling

- Market price above ceiling

- Shortage

- Some consumers win

- Producers lose

- A legally determined maximum price that sellers may charge

Price Floor

- An attempt to stop prices from falling to equilibrium

- Equilibrium below floor

- Surplus

- Quantity supplied is greater than quantity demanded

- A legally determined minimum price that sellers may receive

How to calculate consumer surplus and producer surplus

Area of a triangle

Accounting profit

total revenue minus total explicit cost

economic profit

total revenue - explicit costs - implicit costs

Profit Maximizing Rule

To maximize a profit for a firm with market power, P=MR, so profit maximizing output should be set where MR=MC

Short run

- inelastic

- period of time within which a firm can vary its output by varying only the amount of variable factors, such as labour and raw material

Long run

- elastic

- period of time during which the quantities of all factors, variable as well as fixed, can be adjusted