Trade-offs: We face trade-offs everywhere in life. Taking family finance as an example, the family’s monthly income is limited. When allocating funds, if you choose to use most of the funds to purchase real estate, you may reduce your investment in children’s education, tourism and leisure, etc. In terms of career choice, job seekers may have to sacrifice more personal leisure time and opportunities to accompany their family if they choose to enter a high-paying but high-intensity financial industry.

Opportunity Cost: Opportunity Cost plays a key role in individual and business decision-making. For example, a college graduate faces the choice of continuing his studies and employment. If you choose to continue to pursue a master's degree, in addition to direct costs such as tuition and book fees, you also need to consider the income lost from giving up your work, the practical experience and personal resources accumulated at work. For enterprises, if they decide to invest their funds in new product research and development, the opportunity cost is the possible benefits of giving up investing in other projects or expanding existing businesses.

Marginal decision-making: Enterprise production decisions often rely on marginal analysis. For example, when a garment factory decides whether to add a production line, it needs to compare the marginal cost of the production line (such as new costs such as equipment purchase, personnel recruitment, raw material procurement, etc.) with the marginal revenue (the sales revenue obtained more due to increasing production). If the marginal income is greater than the marginal cost, increasing the production line can increase profits, and the company will make the decision to increase the production line.

Motivation Response: Motivation has a significant impact on people's behavior. The government has introduced a new energy vehicle subsidy policy, and consumers can receive a certain amount of subsidy when purchasing new energy vehicles, which reduces consumers' car purchase costs and encourages more consumers to choose to buy new energy vehicles. Within the enterprise, a performance bonus system is implemented. In order to obtain more bonus income, employees will work harder to improve their work efficiency and performance.

Mutual benefit of trade: Trade can allow all countries and regions to give full play to their own advantages and achieve mutual benefit and win-win results. As a major manufacturing country, China has significant cost advantages in clothing, electronic products and other fields with its rich labor resources and a complete industrial supporting system. The products produced are of high quality and low price and are exported to other countries in large quantities. Australia has rich animal husbandry and mining resources, and its high-quality wool, iron ore and other products are exported to China in large quantities. Through trade, both parties can obtain more types of goods and services at lower costs, improving their respective living standards and production efficiency.

Market mechanism: Taking the pork market as an example, the role of the market mechanism is clearly visible. When the supply of pork in the market is in short supply, pork prices rise, and farmers see an increase in breeding profits, which will increase the number of pig breeding and expand the production scale; at the same time, consumers will reduce the purchase of pork due to the rise in pork prices and instead choose other meat alternatives. As time goes by, the supply of pork gradually increases, demand is relatively stable, and pork prices will gradually fall until a new supply and demand balance is reached. When the market is oversupply, the situation is the opposite. Prices fall, producers reduce production, consumers increase consumption, and the market achieves reasonable allocation of resources through price mechanisms, supply and demand mechanisms and competition mechanisms.

Government intervention: In the event of market failure, government intervention is crucial. Taking polluting enterprises as an example, some chemical enterprises will emit pollutants into rivers and the atmosphere during production, which will have a serious impact on the surrounding environment and residents' health, but the enterprises will not bear all costs for this, which will create negative externalities. The government has imposed pollution taxes to increase the pollution costs of enterprises, prompting enterprises to take environmental protection measures to reduce pollution emissions. For monopoly enterprises, such as some Internet giants, if they form a monopoly position in the market, abuse market power, restrict other enterprises from entering the market, increase service prices, and harm the interests of consumers, the government may conduct anti-monopoly investigations and take measures such as splitting enterprises and restricting market share to restore market competitiveness and protect the legitimate rights and interests of consumers and other enterprises.

Economic Growth: Increased productivity is the core driving force for economic growth. During the Industrial Revolution, the invention and application of new technologies such as steam engines and textile machines greatly improved production efficiency. Taking the textile industry as an example, traditional hand-made textiles are inefficient, and the emergence of textile machines has greatly increased the production speed of textiles and increased the output significantly, which not only met the domestic market demand, but also exported to other countries in large quantities, promoting rapid economic growth in countries such as the United Kingdom. In modern society, the development of information technology, such as the application of technologies such as the Internet, big data, and artificial intelligence, has further improved the production efficiency of various industries and gave birth to many emerging industries, such as e-commerce, sharing economy, and intelligent manufacturing, which has injected new vitality into economic growth.

Inflation: Too much money chases too little commodities is the main cause of inflation, and changes in money supply have a direct and important impact on inflation. In Zimbabwe, for example, in the early 21st century, the government printed a large amount of money in order to deal with economic difficulties, resulting in a sharp increase in the money supply. The number of commodities in the market has not increased significantly accordingly. Too many currencies chased relatively few commodities, prices rose rapidly, and severe inflation occurred. Local prices have risen sharply in a short period of time, people's living costs have increased sharply, the economic order has fallen into chaos, and currency has lost its function as a measure of value and a medium of exchange.

The relationship between unemployment and inflation: There is a clear trade-off between unemployment and inflation in the short term. During recession, in order to stimulate economic growth and reduce unemployment, the government usually adopts expansionary fiscal and monetary policies. For example, increase government spending, increase investment in infrastructure construction, reduce interest rates, and encourage corporate loans to expand production. These policies can stimulate total demand and drive enterprises to increase production, thereby creating more jobs and reducing unemployment rates. However, as total demand increases, it may lead to higher price levels and trigger inflation. For example, after the 2008 global financial crisis, the U.S. government adopted a series of expansionary policies, and the unemployment rate gradually declined, but inflation also rose in the later period. On the contrary, in the period of overheating of the economy, the government will adopt austerity policies to control inflation, reduce government spending and raise interest rates, which may lead to reduced corporate investment, shrinking production scale and rising unemployment.

Law of demand: The law of demand is widely present in daily life. Taking the tourism market as an example, during the peak tourist season, such as the Spring Festival and National Day holidays, air tickets and hotel prices in popular tourist destinations rise, and tourism demand decreases accordingly. Many consumers will choose to avoid these peak periods and choose to travel off-peak to reduce travel costs. During the off-season of tourism, air tickets and hotel prices will decline, while travel demand will rise. Some consumers will seize the price advantage and arrange travel plans.

Supply Law: The agricultural product market reflects the supply law well. Take the fruit market as an example. When the price of apples rises, fruit farmers see that the profits of growing apples will increase, which will increase the planting area of ​​apples, invest more manpower, material resources and financial resources to manage orchards, improve apple production and quality, and increase market supply. On the contrary, when apple prices fall, fruit farmers will reduce the apple planting area, even cut down fruit trees, and turn to planting other more economical fruits, resulting in a decrease in the market supply of apples.

Market balance: The real estate market is a typical example of market balance. In a certain city, when housing demand is strong and supply is relatively insufficient, housing prices will rise. Rising housing prices will attract developers to increase property construction and invest more funds in land purchase, construction, etc., thereby increasing housing supply. With the increase in housing supply, the market gradually reached a balance of supply and demand, and equilibrium housing prices and equilibrium housing quantity have been determined. If the market is oversupply, housing prices will fall and developers will reduce construction projects until the market reaches equilibrium again.

Demand elasticity: The demand elasticity of different commodities varies significantly. Luxury products such as high-end watches, brand-name bags, etc. have high demand price elasticity. Slight changes in the prices of these commodities may cause major changes in demand. When a high-end watch price rises by 10%, consumers may significantly reduce their purchases and instead choose other brands or wait for prices to fall back. As for daily necessities such as rice and cooking oil, the demand price elasticity is relatively small. Even if the rice price rises to a certain extent, consumers' demand for rice will not decrease significantly due to their daily needs, but they may make fine adjustments in brand selection or purchase volume.

Supply Elasticity: The production cycle has an important impact on supply elasticity. Products such as vegetables with short production cycles have greater supply elasticity. When vegetable prices rise, farmers can quickly adjust their planting plans, increase planting area, and use existing land, labor and agricultural facilities to increase the supply of vegetables in a short period of time. However, goods such as automobiles with longer production cycles have less supply elasticity. Automobile production requires the construction of factories, purchase of equipment, train workers, establishing supply chains, etc. When automobile prices rise, enterprises need to increase production and invest a lot of time and funds to expand production capacity, and it is difficult to increase production rapidly in a short period of time.

Elastic application: In tax policy analysis, elasticity plays a key role. When the government imposes taxes on cigarettes, consumers' demand for cigarettes is less affected by prices due to the less elasticity of cigarettes. Even if the price of cigarettes increases due to taxation, consumers will still buy them in order to meet their smoking needs, so the proportion of tax burden borne by consumers will be larger. On the contrary, for commodities with high demand elasticity, such as high-end cosmetics, when government taxes lead to prices rising, consumers may reduce purchases, and producers have to bear more tax burdens in order to maintain sales.

Price control: Both the upper and lower limit policies of the price have a significant impact on the market. Taking the rent control policy as an example, in order to protect the housing rights and interests of low-income groups, some cities implement rent control policies to limit the increase in rents. However, this may lead to landlords reducing their rental properties, as rental income cannot cover costs or realize expected benefits. The number of houses available for rent on the market has decreased, and the problem of difficulty in renting a house may also lead to a decline in the quality of the house and the landlord lacks the motivation to maintain and improve the house. The same is true for the minimum wage policy. When the government stipulates that the minimum wage standard is higher than the market equilibrium wage, the labor costs of enterprises increase. In order to control costs, enterprises may reduce the number of labor employed, resulting in an increase in unemployment, especially for some low-skilled workers, and employment opportunities may be more affected.

Tax destination: The distribution of tax burden between producers and consumers depends on supply and demand elasticity. When taxing salt, since salt is a necessity for daily life, the demand elasticity is extremely small, and consumers are not sensitive to changes in the price of salt. Even if the price of salt increases due to taxation, consumers must buy it, so consumers bear most of the tax burden. When taxing high-end leather bags, due to the high-end leather bags' demand for high-end leather bags, rising prices will reduce consumers' purchases. In order to avoid a sharp drop in sales, producers will bear more tax burdens, and may digest tax costs by reducing profits and optimizing production processes.

Utility Maximization: When consumers buy products, they always pursue utility maximization. Taking the purchase of fruits as an example, consumers like apples and bananas. The price of apples is 5 yuan/jin, and the marginal utility is 10; the price of bananas is 3 yuan/jin, and the marginal utility is 15. At this time, the ratio of the marginal utility to the price of apple is 10÷5 = 2, and the ratio of the marginal utility to the price of banana is 15÷3 = 5. In order to maximize utility, consumers will buy more bananas and reduce the purchase of apples until the marginal utility and price ratio of the two are equal to that of the best consumption combination.

Indifference curve: Indifference curve can intuitively reflect consumer preferences. Taking consumers' preference for coffee and milk tea as an example, a different combination of coffee and milk tea on an indifference curve can bring the same level of utility to consumers. The marginal substitution rate indicates the number of milk tea cups consumers are willing to give up in order to increase a unit of coffee. If consumers have a strong preference for coffee, the marginal replacement rate is higher, that is, consumers are willing to give up more milk tea in exchange for a unit of coffee; conversely, if consumers have a stronger preference for milk tea, the marginal replacement rate is lower.

Budget constraint line: Consumers’ purchasing behavior is subject to budget constraints. Suppose the monthly income of consumers is 5,000 yuan, the price of rice is 50 yuan/bag, and the price of cooking oil is 80 yuan/barrel. The budget constraint line can represent the combination of consumers at different purchases of rice and edible oil. If consumers buy all rice, they can buy 5000÷50 = 100 bags; if they buy all cooking oil, they can buy 5000÷80 = 62.5 barrels. When consumers actually purchase, they need to choose the appropriate combination of rice and cooking oil purchases within the budget constraint line according to their own preferences and budget.

Cost analysis: There are multiple cost concepts involved in the production process of an enterprise. Taking automobile manufacturing companies as an example, monthly factory rent, equipment purchase costs, etc. are fixed costs and do not change with changes in automobile production. Assume that the factory rent is 1 million yuan per month and the equipment depreciation is 500,000 yuan per month. The cost of raw materials such as steel, parts and workers' wages required for each car production is variable cost and increases with the increase of automobile production. For each car produced, the variable cost is 50,000 yuan. If 100 cars are produced, the variable cost is 5×100 = 5 million yuan. Marginal cost is the cost of increasing one unit of output. When the output of a car increases from 100 to 101 vehicles, if the increased cost is 52,000 yuan, then this 52,000 yuan is the marginal cost of the 101st car. The marginal cost curve is closely related to the average total cost curve and the average variable cost curve. The marginal cost curve will first decrease and then rise. When the marginal cost is lower than the average total cost, the average total cost will decrease; when the marginal cost is higher than the average total cost, the average total cost will increase.

Profit Maximization: The production goal of an enterprise is to maximize profits. Taking mobile phone manufacturers as an example, during the production process, companies will continue to compare marginal returns and marginal costs. When the marginal cost of producing a mobile phone is 1,500 yuan and the market price is 2,000 yuan, the marginal benefit is greater than the marginal cost, and an increase in output by the company can increase profits. As output increases, marginal costs may rise as the scale effect gradually weakens. When the marginal costs rise to 2,000 yuan, which is equal to the marginal income, the company maximizes profits. At this time, the company has reached the optimal production scale and will no longer easily increase or decrease production.

Consumer surplus: When consumers buy goods, they often get consumer surplus. For example, consumers are interested in a smart watch and are willing to pay 5,000 yuan based on their preference for the watch and their functional needs. When actually purchasing, due to merchant promotions, market competition and other reasons, consumers buy the watch at a price of 4,000 yuan, so the consumer's remaining amount is 5,000 - 4,000 = 1,000 yuan. Consumer surplus measures the additional benefits consumers receive from market transactions, reflecting the portion of the value consumers receive when purchasing goods exceeds their paid price.

Producer surplus: Producers can also obtain producer surplus when selling goods. Taking mobile phone production as an example, the cost of a producer to produce a mobile phone is 3,000 yuan, including various costs such as raw material procurement, production and processing, transportation and sales. When the producer sells the phone for 4,000 yuan, the producer's remaining amount is 4,000 - 3,000 = 1,000 yuan. Producer surplus reflects the additional benefits the producer receives from market transactions, reflecting the portion of the price the producer receives when selling goods exceeds their production costs.

Market efficiency measurement: In a perfectly competitive agricultural product market, market efficiency is fully reflected. Many farmers and consumers trade freely in the market, and prices are determined by the market supply and demand relationship. Consumers can buy the required agricultural products at reasonable prices, and producers can also make reasonable profits. Market transactions maximize the total surplus (the sum of consumer surplus and producer surplus), and resources are effectively allocated. In the event of monopoly or other market failures, if monopoly enterprises control market prices and output, it will lead to output being lower than the perfect competition level, price being higher than the perfect competition price, consumer surplus decreases, and although producer surplus may increase, the total social surplus decreases, resulting in unnecessary losses, and market efficiency decreases.

Features: The agricultural product market is a typical perfectly competitive market. Taking the wheat market as an example, there are many wheat growers on the market. Each grower has a relatively small planting scale, and the wheat products are basically homogeneous, and there are no obvious brand differences. Growers can freely enter or exit the market. If they find that the profits of growing wheat are considerable, new growers can easily enter production; if the profits are not good, growers can also choose to change to other crops or give up planting. At the same time, the market information is completely symmetrical, and buyers such as growers and flour processing plants can obtain information on the market price, supply and demand of wheat in a timely and accurate manner in order to make reasonable production and procurement decisions.

Short-term equilibrium: In the vegetable market, vegetable prices fluctuate frequently in the short term, reflecting the short-term equilibrium characteristics of a perfectly competitive market. Vegetable farmers make profits when the price of vegetables is higher than the average total cost. For example, in a certain period, due to weather reasons, the supply of vegetables in other places decreased, local vegetable prices rose, vegetable farmers' sales revenue increased, and profits were obtained after deducting production costs. When the price is lower than the average total cost but higher than the average variable cost, the vegetable farmers will continue to produce although they suffer losses, because continuing production at this time can make up for some of the fixed costs. For example, in winter, vegetable planting costs are high, and the market price may be lower than the average total cost, but higher than the average variable cost. In order to reduce losses, vegetable farmers will continue to plant and wait for prices to rebound. When prices are below average variable costs, vegetable farmers will stop production because continuing production will not only fail to compensate for the fixed costs, but will also increase the loss of variable costs.

Long-term equilibrium: In the long run, a perfectly competitive market will achieve zero economic profits. Take the apple market as an example. If the price of apple rises in a certain period and growers make profits, it will attract more people to enter the market and increase the apple planting area and yield. As market supply increases, Apple's price gradually declines and profits decrease. On the contrary, if the growers suffer losses, some growers will withdraw from the market, reducing the supply of apples, leading to rising prices and increasing profits. Ultimately, the market reaches a state of equilibrium, where farmers can only obtain normal profits, economic profits are zero, and the long-term supply curve will appear to be horizontal or close to the horizontal.

Reasons for formation: There are many reasons for the formation of a monopoly market. In terms of resource monopoly, some mineral resources are monopolized by a few companies, such as the global diamond market. De Beers controls a large number of diamond mineral resources and occupies a monopoly position in the market with its resource advantages. In terms of government franchise, the State Grid operates power transmission business through the government, forming a monopoly in a specific area. In terms of natural monopoly, because the cost of laying water supply pipes in urban water supply enterprises is extremely high, one enterprise can achieve economies of scale and reduce costs. If multiple enterprises compete, the cost will increase significantly, thus forming a natural monopoly.

Monopoly Enterprise Decision: When making decisions, monopoly water supply companies will maximize profits by controlling output and increasing prices. Enterprises will determine the water supply price and water supply based on market demand and their own costs. Since the demand curve faced by monopoly companies is the overall demand curve of the market, it tilts to the lower right, it means that to increase sales, prices must be reduced. Monopoly companies will set their output at the level where marginal returns are equal to marginal costs, and the profit will reach the maximum. For example, if a water supply company finds through market research that when the water supply is 1 million tons, the marginal income is 2 yuan per ton and the marginal cost is 1.5 yuan per ton. When the water supply continues to increase to 1.01 million tons, the marginal income drops to 1.8 yuan per ton and the marginal cost rises to 1.6 yuan per ton, the enterprise will choose to maintain the water supply at 1.01 million tons and increase the price accordingly to obtain the maximum profit.

Monopoly Welfare Loss: Monopoly can lead to significant welfare losses. Compared with the perfectly competitive market, monopolistic companies limit output to levels below perfectly competitive levels in pursuit of profit maximization. Taking the power monopoly enterprises as an example, in a perfectly competitive market, assuming that the equilibrium output is 10 million kilowatt-hours, the price is 0.5 yuan per kilowatt-hours; in order to increase the price, monopoly enterprises reduce the output to 8 million kilowatt-hours, and the price is 0.7 yuan per kilowatt-hours. This part of the demand for consumers who were willing to buy an additional 2 million kilowatt-hours of electricity at a price of 0.5-0.7 yuan could not be met. The surplus of this part of the consumer disappeared. At the same time, producers also lost some of the profits they could have obtained due to the reduction of production, resulting in unnecessary losses and reducing the overall welfare level of society.

Price discrimination in monopoly enterprises

Features: There are many companies in the market, with different products and enterprises freely entering and leaving the market. For example, the fast food market has many brands such as McDonald's, KFC, Burger King, etc., and their products have differences in taste, packaging, and service. McDonald's attracts family consumers with its standardized food production process and a happy dining environment; KFC continues to launch localized specialty products, such as old Beijing chicken rolls, to meet the taste needs of different consumers; Burger King emphasizes the unique flavor and personalized customization services of specialty products such as "Huangbao". New fast food companies can enter the market relatively freely and attract consumers with innovative products or services.

Short-term and long-term balance

Strategies for product differentiation

Characteristics: The market is controlled by a few companies, and enterprises are interdependent and decisions are mutually influential. For example, the automobile market, a few large auto manufacturers, such as Toyota, Volkswagen, General Motors, etc., occupy most of the market share worldwide. The decisions made by these companies in terms of output, price, R&D, marketing, etc. will have a significant impact on the market share and profits of other companies. Toyota's launch of a new hybrid model may attract consumers who were originally inclined to buy cars from other brands, causing other automakers to drop market share, prompting them to speed up the development of new models or adjust their price strategies.

Game theory analysis

Cooperation and competition among oligopolistic enterprises

Definition and classification: The non-compensatory effect of a person's behavior on the welfare of bystanders is divided into positive externalities (such as education, research and development) and negative externalities (such as pollution, noise). For example, a person's good education not only improves his or her own knowledge and skills level, but also develops positive externalities to society. Well-educated people may create more value at work, promote industry technological progress, and improve the productivity and civilization of the entire society; at the same time, they are more likely to participate in social welfare activities and contribute to the harmonious development of society. The pollution emissions of enterprises will have negative externalities to the surrounding environment and residents' health. Some chemical companies discharge untreated sewage into rivers during production, resulting in river pollution, the safety of drinking water of surrounding residents is threatened, fishery resources are damaged, and agricultural irrigation is affected, which brings additional costs to society.

Solutions to externalities

Externality and sustainable development

Public goods

Public Resources

Expression form

Solutions

New Problems of Information Asymmetry in the Digital Economy Era

New measures to deal with information asymmetry