Preferences and Choices
Happiness and Value
Happiness: comprehensive personal development, including the satisfaction of personal physiological and social desires, as well as the development of personal potential
The time dimension of happiness: What people pursue is not happiness at a specific moment, but happiness throughout a lifetime
Discount factor and discount rate
The spatial dimension of happiness: Human happiness depends on multiple factors rather than a single factor
Value: Marginal contribution to the ultimate goal of happiness
Happiness is a subjective judgment, so value is also a subjective concept
Personal preferences and constraints
Preference: a tendency to like or dislike an item or action
Satisfaction of personal preferences comes from both the results and the process itself
Utilitarianism: A moral philosophy that believes that the goal of human behavior is to maximize one's own utility, or it can also be said to be to maximize personal happiness and minimize personal pain.
Preferences must satisfy the axiom of completeness and the axiom of consistency (transitivity axiom)
Axiom of completeness: Any two alternatives are comparable. Assuming that A and B are two different choices, a rational person must think that either A is better than B, or B is better than A, or there is no difference between the two. There are no two options that cannot be compared
Consistency Axiom (Transitivity Axiom) Simply put, if a person thinks A is better than B, and he also thinks B is better than C, then he will definitely think A is better than C. If this assumption is not met, for example, a person thinks A is better than B, B is better than C, but also thinks C is better than A, it means that this person is irrational.
The relationship between utility function preferences and the means to satisfy them, showing how changes in consumption affect changes in the amount of value they bring
Marginal utility: The increment in utility brought about by increasing the consumption of one unit of a product. The law of diminishing marginal utility: As consumption increases, the marginal utility of a product decreases.
Selected constraints
Technical constraints: some options are technically impossible
Institutional constraints: constraints imposed by humans through institutional rules
Moral constraints: constraints imposed by humans through moral rules
Information constraints: Constraints caused by lack of sufficient information
Robinsonomics
Robinson economy: an individual economy in which producers and consumers become one, without exchange intervention
Marginal cost: the price paid or the benefit forgone to increase the production (or consumption) of one unit of product
Optimal decision rule: The optimal choice is achieved when marginal utility equals marginal cost
Optimal output is reached when the distance between the total utility curve and the total cost curve is maximum, when marginal utility equals marginal cost
Diversification of Robinsonomics
indifference curve
The line connecting all product combination points given the same utility level reflects the substitutability of different products in preferences. For goods with positive marginal utility, their indifference curves slope downward.
The Law of Diminishing Marginal Rate of Substitution: Under the premise of maintaining the same level of utility, as the consumption of a certain commodity increases, the consumption of other commodities that the product can replace will decrease accordingly.
Production Feasibility Curve
production feasibility frontier
Optimal production mix
Optimal selection conditions
Personal choice is how to maximize the utility function while satisfying resource constraints.
The basic condition for optimal choice is that marginal utility equals marginal cost
Economic way of thinking
Why study economics
Better understanding of world history
Better transform the living environment
Understand how the real world works
Evaluate the pros and cons of government policies
What does economics study?
It is the science of how to allocate scarce resources effectively
The science of how rational people make decisions
It is the study of how humans cooperate
How to think like an economist
Human behavior has a purpose
Only individuals have the ability to make decisions
There is no free lunch in the world
Opportunity cost: the maximum value that people must give up to achieve a certain goal
People make choices at the margins
Margin: a small adjustment to an existing action
Free exchange is mutually beneficial
Division of labor is the source of progress
Results are more important than motivation
It depends on whether the result of the policy is consistent with the goal or opposite.
Depends on whether there are lower cost alternatives for the same goal
It depends on whether the policy recognizes "consumer sovereignty"
Free competition is a good thing
Free competition allows "self-interest" to produce "benefit for others"
The system is stronger than people
Human nature and institutions influence each other. People's behavior can be changed by changing the system
The world is uncertain, entrepreneurs are important
World uncertainty creates our need for entrepreneurship
market logic
Human history has evolved under the constant influence of "the logic of bandits" and "the logic of the market"
The market not only has "an invisible hand", but also "an invisible eye"
The relationship between economics and other disciplines
Economics adheres to the research idea from the individual to the society, and from the micro to the macro.
Sociology adheres to the research ideas from society to individuals, and from macro to micro.
The history and future of economics
Microeconomics: A subfield of economics that studies the decision-making and market transaction behavior of households and businesses
Macroeconomics: A branch of economics that studies the functioning of the economy as a whole
Exchange Division of Labor and Money
Direct exchange
The benefits of exchange arise either from differences in initial endowments, differences in preferences, or both.
Transaction terms depend on the bargaining power of the parties. Free competition will make trading conditions fairer
Free exchange brings benefits to both parties to the transaction, thereby increasing the total wealth of society.
Exchange occurs either due to different personal preferences, different resource endowments, or both.
Division of labor and comparative advantage
vertical division of labor
Indirect exchange and money
Indirect exchange: Exchange mediated by money
Market economy
Separation of producers and consumers
Production meets consumption, consumption determines production
economic circular flow model
Household Firms Product Market Factor Market
The function of price
Price is the main mechanism for coordinating production and consumption
The core of market economy is the price mechanism
Determine income distribution
Consumer choice and demand curve
Optimal consumption combination selection
Consumers maximize utility by choosing a consumption mix that satisfies budget constraints. The basic condition for the optimal consumption mix is that the marginal utility obtained by the last 1 penny of expenditure is the same no matter what kind of commodity is consumed.
The optimal consumption mix means that the demand for a good changes with changes in consumer preferences, income, and the price of the good.
Comparative static analysis
Personal demand curve and law of demand
Demand Curve Complements Substitutes
Demand elasticity
Price elasticity of demand
Income elasticity of demand
Sum of demand and market demand curve
Market demand curve
The price elasticity of market demand is greater than the price elasticity of individual consumer demand, which means that the total demand curve of the market is flatter.
Measures of Economic Development
Economic progress manifests itself in the necessities of luxury goods due to rising incomes and falling prices due to technological progress. Therefore, restricting the current consumption of luxury goods by a few people is equivalent to preventing the consumption of necessities by the majority in the future.
The demand curve is a downward sloping curve. When the price of a good falls, the quantity demanded by consumers increases along the demand curve (except for Giffen goods). A decrease in the price of substitutes will cause a decrease in the quantity demanded, and a decrease in the price of a complement will cause an increase in the quantity demanded. The price effect is the result of the joint action of the substitution effect and the income effect. The demand curve shifts due to changes in preferences, income, and prices of other goods. The market demand curve is the horizontal summation of individual demand curves and is therefore more likely to be a smooth downward sloping curve.
Production and supply curve
Production technology
short run production function
The law of diminishing marginal productivity
long run production function
marginal rate of technical substitution
The Law of Diminishing Marginal Rate of Technical Substitution
Production refers to the conversion from input to output, and the production function is the quantitative relationship between factor input and product output. In the short term, only one or part of the input factors are variable; after output exceeds a certain level, the marginal productivity of variable factors will decrease. But in the long run, the input amounts of all factors can change, and the production function can show increasing, constant, or decreasing returns to scale.
Production costs
cost function cost curve
short run cost curve
When average cost is higher than marginal cost, average cost decreases as output increases;
When average cost is lower than marginal cost, average cost rises as output increases.
long run cost curve
Given the output target, how does a company choose the lowest cost factor input combination?
How minimum cost changes with output
The optimal combination requires that the marginal product of the last unit of cost expenditure is the same whether it is spent on capital input or labor input.
Profit maximization
Business goals
Accounting profit
Opportunity cost
Hidden costs that cannot be observed in the accounts but have an impact on decision makers
Flooding costs
Can be seen in financial statements but does not affect current decisions
Economic cost = accounting cost, implicit opportunity cost - sunk cost
Economic profit = accounting profit - implicit opportunity cost sunk cost
Conditions for maximizing profits
Marginal revenue = marginal cost
Short-term profits and production decisions
Break-even point Stop business point
Long-term profits and production decisions
Long-run equilibrium: price equals minimum long-run average cost
supply curve
Short-run supply curve: the marginal cost curve above the minimum point of short-run average variable cost
Long-run supply curve: the portion of the long-run marginal cost curve above the lowest point of the long-run average cost curve
Price elasticity of supply: the ratio of the rate of change in supply to the rate of change in price
Market supply curve: obtained by the horizontal summation of the supply curves of all manufacturing enterprises
The short-run supply curve is the marginal cost curve above the minimum point of average variable cost. The long-run supply curve is the long-run marginal cost curve above the lowest point of long-run average cost. In both the short run and the long run, quantity supplied rises as price rises
Supply, Demand and Price
Markets and Equilibrium
Balanced movement and adjustment
Competition between buyers and sellers moves prices from equilibrium to equilibrium.
Balanced example analysis
The signaling function of price
Prices coordinate consumption and production
Prices convey producers’ cost information and consumers’ demand information
Price guides the flow of resources from low-efficiency departments to high-efficiency departments
Price regulates supply and demand. The intersection of the demand curve and the supply curve determines the equilibrium price and equilibrium output. In equilibrium, the marginal cost of a product in production is equal to the marginal utility in consumption, and the total social surplus reaches the maximum.
Efficiency loss of government intervention
planned economy
The superiority of the price system over the planning system lies not only in its correction of imbalances, but also in its adaptation to and promotion of changes.
Maximum limit price Minimum protection price
Price controls can lead to efficiency losses and corruption
Taxes change equilibrium price and equilibrium output, causing prices to rise and output to fall. The share of the tax burden depends on the slopes of the demand and supply curves
General equilibrium and non-price mechanisms
General equilibrium: all markets reach the equilibrium price at which supply equals demand at the same time
Non-price mechanism: regulating supply and demand through quotas, queuing, restrictions, etc.
Factor Market and Income Distribution
Contract income and residual income
Derived Demand and Factor Demand Curves
The demand curve of a factor is the marginal revenue curve of the factor
Capital Markets and Interest Rates
Interest rate: the price of capital, which in equilibrium is equal to the marginal productivity of capital multiplied by the price of the product
Rising interest rates will bring about both the substitution effect and the income effect
Interest rate control and interest tax
Ground rent and rent theory
Land rent: the price of land services, which in equilibrium is equal to the marginal productivity of land multiplied by the price of the product
Differential land rent: the difference in land rent caused by different land quality
Market-determined income distribution and government intervention
The distribution pattern of total social income
Consequences of government intervention in factor markets
In a market economy, income distribution is determined by the price mechanism. Factor prices constitute the income of factor owners.
Enterprise demand for intermediate products and factors is derived demand, that is, this demand comes from consumer demand for final products.
Government intervention in factor markets will distort the price mechanism and lead to efficiency losses, but it will not contribute to social equity.
Entrepreneurs and market processes
Market Economy = Price Entrepreneur
Discover imbalances and arbitrage
Market imbalances include spatial imbalances, temporal imbalances, and imbalances between product markets and factor markets.
Create imbalance and innovation
Basic points of innovation
reduce manufacturing cost
The social significance of innovation
Entrepreneurial innovation is both creative and destructive to society. The driving force for economic development comes from this kind of "creative destruction"
Intrinsic qualities and external environment for entrepreneurial success
intrinsic elements
Alert to profit opportunities
Have a vision and the ability to judge the future
Have the courage to take risks
environment system
Freedom to start a business and innovate
Effective property rights protection and rule of law
stable policy expectations
Competition and Monopoly
Economic and political concepts of monopoly
market structure
The economic concept of monopoly determines the monopoly status of the market based on market concentration.
The political concept of monopoly determines the monopoly status of the market based on whether the government imposes restrictions on competition through legal or administrative means.
The theory of perfect competition in traditional economics
perfect competition
(1) There are no obvious barriers to entry or exit in the industry
(2) There are a large number of small-scale manufacturers, and all manufacturers produce exactly the same standardized products without any difference in quality and performance.
(3) Complete information exists (including technical relationships, prices, etc.)
(4) Every producer is a price taker, and all manufacturers sell products at the same price.
Monopoly Pricing Theory of Traditional Economics
perfect price discrimination
Oligopoly Competition Theory of Traditional Economics
Nash Equilibrium
The combination of the optimal strategies of all participants
price competition model
Bertrand's Paradox
Capacity constraints or diminishing marginal returns
The "gathering point" of competition
The Right and Wrongs of Antitrust
Antitrust content
The original intention of antitrust law is to maintain market order and protect consumer interests, but the results may be contrary to the original intention.
abuse of dominant market position
High prices and high profit practices
Wrong choice of "perfect competition" as the frame of reference
misunderstood the enterprise
A true monopoly can never come from competition, but it can come from government. Government-imposed barriers to entry, such as entry restrictions, franchises, special subsidies, and state-owned enterprises, are the real sources of monopoly
Externalities and public goods
Pareto efficiency criterion
The First Theorem of Welfare Economics
production feasibility frontier
The first theorem of welfare economics: The equilibrium result of a perfectly competitive market must be Pareto optimal.
Externalities and Coase’s Law
Positive externalities Negative externalities
Coase's Law and Property Rights
The prerequisite for the establishment of the Coase theorem is that transaction costs are zero or very small.
The Fallacy of the Concept of Externalities
Externalities are essentially a matter of defining property rights
If the definition of property rights is clear, the so-called externality can be understood as an infringement of the property rights of others.
Technological advances will make it easier to define property rights
public product
Products that are neither exclusive nor competitive
Public goods do not constitute a legitimate reason for government intervention in the market. Traditional economics has expanded the scope of public goods, and pure public goods are far less common than people think. Even purely public goods can be produced privately
Asymmetric information and markets
Asymmetric information concept
adverse selection
Moral Hazard
Examples of market failure
used car market
Adverse selection in the used car market is the process of high-quality cars withdrawing from the market
insurance market
Information asymmetry causes low-risk people to drop out of insurance
credit market
If the information is symmetrical, high-quality projects can get loans and low-quality projects cannot, which is also the most efficient for society.
Due to the existence of asymmetric information, not all good products can be sold, not all risks can be insured, and not all good projects can be financed. More generally, not all good people are rewarded. This is what economists call a "market failure" caused by asymmetric information.
Market mechanisms to solve problems
The market does not fail because the market itself has a mechanism to solve asymmetric information problems
The market itself is premised on asymmetric information, not symmetric information.
Reputation mechanism
Enterprise as carrier
With organizations like enterprises, reputation mechanisms can better solve the adverse selection problem caused by information asymmetry.
For a reputation mechanism to operate effectively, the most important things are effective property rights protection, freedom of transactions, and freedom of entry and exit.
Government Regulation and Market Reputation
Excessive government regulation is not only inefficient in itself, but also damages the reputation mechanism of the market. Many phenomena appear to be market failures, but the real cause is excessive regulation.
Introduction to Macroeconomics
Concept
Main research questions
long-term economic growth
short-term fluctuations in the economy
A brief history
Criticism of Keynesianism
rational expectations theory
gross domestic product
GDP
GDP is a concept of market value
GDP includes not only the value of products, but also the value of labor services
GDP measures the final value of products or services
GDP is the value of final products produced within a certain period of time, not the value of final products sold
GDP is a flow, not a stock
GDP generally refers only to the value caused by the market
Inflation
as a result of
Reduce the efficiency of resource allocation
leading to predatory wealth redistribution
Exacerbating cyclical fluctuations in the economy
Unemployment rate
Important indicators to describe the utilization of labor resources
labor force participation rate
The relationship between unemployment rate and GDP
Okun's law: a relationship between the rate of change of the unemployment rate and the rate of change of real GDP
economic growth
Fact
Economic growth: the sustained increase in the level of per capita output (or per capita income) of a country or region within a certain period of time
Source and Growth Accounting
factors of production productivity
Mainstream economic growth theory
Malthus's "Growth" Theory
Malthusian model: Without "capital deepening" and productivity improvement, per capita output cannot achieve sustained growth, and there will only be a cycle that starts over and over again.
Neoclassical Growth Theory: Solow Model
Solow model: Higher savings rate, lower population growth rate, and faster technological growth will increase the per capita output level under steady-state conditions
application
Explanation of income differences across countries
Explanations for differences in growth rates
Golden Rule Capital Levels
Ramsey Cass Koopmans model
A growth model that allows representative consumers to make endogenous choices about saving rates
Entrepreneur The King of Economic Growth
Smith-Schumpeter growth model
Entrepreneurs discover markets, create divisions of labor, and promote technological progress through innovation, thereby promoting economic growth.
Economic Fluctuations
Two characteristic facts
Aggregate demand aggregate supply model
A model that combines the aggregate demand curve and the aggregate supply curve to analyze the relationship between aggregate output and the aggregate price level in the economy.
aggregate demand curve
Wealth effect: the impact of changes in the price level on the purchasing power of money
Interest rate effect: the impact of price level changes on money supply and interest rates
Exchange rate effect: the impact of changes in the price level on exchange rates
move
Consumption increases and the aggregate demand curve shifts to the right
Investment increases and the aggregate demand curve shifts to the right
Government spending increases and the aggregate demand curve shifts to the right
Net exports increase and the aggregate demand curve shifts to the right
aggregate supply curve
Long-run aggregate supply curve: The long-run aggregate supply curve is a vertical line
move
As labor supply increases, the long-run aggregate supply curve shifts to the right
The capital stock increases and the long-run aggregate supply curve shifts to the right
The supply of natural resources increases and the long-term aggregate supply curve shifts to the right.
Productivity increases and the long-run aggregate supply curve shifts to the right
Short-term aggregate supply curve: The short-term aggregate supply curve is a line that slopes upward to the right.
move
Increases in labor, capital, and natural resources, as well as increases in productivity, will shift the short-run aggregate supply curve to the right
An increase in the expected price level will shift the short-run aggregate supply curve to the left
The long-term aggregate supply curve reflects the production potential of goods and services in the entire economy. All factors that change production factors or productivity will cause changes in the supply of goods and services in the economy, thereby causing a shift in the long-term aggregate supply curve.
Explanation of economic fluctuations under the framework
Shift in the aggregate demand curve
Shift in the aggregate supply curve
Macroeconomic Policy Analysis
Monetary Policy
How central banks regulate the money supply
Adjust the statutory deposit reserve ratio
Adjust the rediscount rate
other means
Adjust reserve interest rate
standing lending facilities
Liquidity preference theory and the determination of equilibrium interest rates
Money supply: the currency stock of a country that serves social and economic operations at a certain point in time.
Money demand: The amount of money society as a whole is willing and able to hold at a certain time
fiscal policy
Changes in government purchases
Since the multiplier effect and the crowding-out effect exist simultaneously, the total effect of fiscal policy is uncertain
Debate
Should the government regulate the economy through macroeconomic policies?
How should governments balance different policy goals?
Phillips Curve: A curve showing the trade-off between unemployment and inflation
Austrian macroeconomic theory
Three major characteristics of the economic cycle
When an economic crisis occurs, entrepreneurs seem to make mistakes all at once.
In the economic cycle, regardless of output or price, raw materials fluctuate the most, followed by intermediate goods, and consumer goods fluctuate the least.
A widespread “money shortage” occurs during economic crises
Production structure Entrepreneurial expectations and money
production process and capital structure
Roundabout production and entrepreneurial expectations
Analysis on growth and cycles
Enlightenment
The economy should be viewed with structured thinking
Macroeconomic policies should be used with caution
One of the revelations of the Austrian school theory: we should not only focus on aggregate indicators such as GDP and CPI, but should focus more on the economic structure.
The second inspiration of the Austrian school theory: Macroeconomic policies should be used with caution, and future recession should not be exchanged for current prosperity.
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