Glamor Economics

Chapter 13

Chapter 2 Section 6 Seven Fundamental Principles of Economics

A group of economists climb the Alps.A few hours after setting out, they got lost.

One of them studied the map very seriously, looking straight ahead, backward, sideways, and upside down. He looked at the surrounding terrain, positioned himself with a compass, and squinted his eyes to visually measure the height of the sun.

Finally, he finally spoke: "Everyone, do you see that big mountain?"

"I see." Everyone replied hopefully.

"According to the map, we're standing on top of that mountain!"

This joke reflects a characteristic of economics, that is, it has many principles and analytical tools.Economics is a science that explains social phenomena. For this reason, economists have made many assumptions and models, and proposed many concepts and principles to explain the economic world around us.After more than 200 years of development, economics has formed a huge disciplinary theoretical system. If you want to understand the whole of economics, you should first understand the following important economic principles.

Principle [-]: There is an opportunity cost to get something
The opportunity cost of something is what you give up to get it.For example, the opportunity cost of the postgraduate entrance examination in terms of economics is: the postgraduate entrance examination will cost thousands of yuan, and you will lose your salary during the postgraduate entrance examination. .

Principle [-]: Marginal Benefits and Marginal Costs Determine People's Behavior
Marginal revenue is the change in total revenue that results from an increase in sales of one unit of product.When a plane is about to take off, there are still 10 empty seats. A passenger who is waiting for a refund at the boarding gate is willing to pay 300 yuan for a ticket (the original price is 800 yuan). Should the airline sell it to him?Of course it should.If the plane has empty seats, the marginal cost of adding an extra passenger is simply the bag of peanuts and drink that the extra passenger will consume.A rational decision maker should take an action whenever the marginal benefit of the action exceeds the marginal cost.

Principle [-]: People respond to incentives

Because people make decisions by comparing costs and benefits, their behavior changes when costs or benefits change.That is, people respond to incentives.For example, when pork prices rose in 2007, people decided to eat less meat and more vegetables because the cost of eating pork was high.At the same time, the pig farm decided to invest more money to raise more pigs because the income from raising pigs was higher.

When analyzing any decision, we should not only consider the direct impact, but also the indirect impact of incentives. Only in this way can we make more reasonable decisions.

Principle [-]: Trade makes everyone better off

Domestic trade: In a market economy, although your family competes directly or indirectly with other families, you will not necessarily be better off if you isolate your family from other families.If isolated, your family has to grow its own food, make its own clothes, and build its own house, which is inefficient.

International trade: Countries can benefit from mutual transactions.For example, the United States has obtained cheap and high-quality consumer goods from China, and China has obtained high-tech medical and production equipment from the United States.

Principle [-]: A country's standard of living depends on its ability to produce goods and services
In a globally integrated economy, a country's standard of living is closely related to its ability to produce goods and services.Generally speaking, the stronger a country's ability to produce goods and provide labor services, the more advantages it has in trade, and the higher the country's economic level and national living standards.

Principle [-]: When the government prints too much money, prices rise
Inflation is an increase in the general level of prices in an economy.What Causes Inflation?In most cases of severe or persistent inflation, the culprit is always the same: growth in the quantity of money.When a government prints a large amount of its own currency, the value of the currency falls, so the same thing costs more to buy.

Inflation occurs for another reason: the demand for a commodity far outstrips the supply.

Principle Seven: Society faces a short-run trade-off between inflation and unemployment
When the government reduces the amount of money due to inflation (such as raising interest rates to attract people to deposit money in banks, thereby reducing the amount of money in the market), it reduces the amount of money that people spend.The combination of lower spending and temporarily high prices reduces the amount of goods and services that firms sell.The reduction in sales causes firms to lay off workers, temporarily increasing the unemployment rate.On the one hand, the amount of money decreases, and on the other hand, the unemployed reduce the purchase of goods. The reduction in demand for goods will lower the price of goods (that is, reduce inflation).

(End of this chapter)